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Short-term interest rate futures as monetary policy forecasts

  • Giuseppe Ferrero


    (Bank of Italy, Economics and International Relations)

  • Andrea Nobili


    (Bank of Italy, Economics and International Relations)

The prices of futures contracts on short-term interest rates are commonly used by central banks to gauge market expectations concerning monetary policy decisions. Excess returns - the difference between futures rates and the realized rates - are positive, on average, and statistically significant, both in the euro area and in the United States. We find that these biases are significantly related to the business cycle only in the United States. Moreover, the sign and the significance of the estimated relationships with business cycle indicators are unstable over time. Breaking the excess returns down into risk premium and forecast error components, we find that risk premia are counter-cyclical in both areas. On the contrary, ex-post prediction errors, which represent the greater part of excess returns at longer horizons in both areas, are correlated with the business cycle (negatively) only in the United States.

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Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 681.

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Date of creation: Jun 2008
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Handle: RePEc:bdi:wptemi:td_681_08
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