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Federal Funds Rate Prediction

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  • Sarno, Lucio
  • Thornton, Daniel L
  • Valente, Giorgio

Abstract

We examine the forecasting performance of a range of time-series models of the daily US effective federal funds (FF) rate recently proposed in the literature. We find that: (i) most of the models and predictor variables considered produce satisfactory one-day-ahead forecasts of the FF rate; (ii) the best forecasting model is a simple univariate model where the future FF rate is forecast using the current difference between the FF rate and its target; (iii) combining the forecasts from various models generally yields modest improvements on the best performing model. These results have a natural interpretation and clear policy implications.

Suggested Citation

  • Sarno, Lucio & Thornton, Daniel L & Valente, Giorgio, 2004. "Federal Funds Rate Prediction," CEPR Discussion Papers 4587, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:4587
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    Cited by:

    1. repec:ebl:ecbull:eb-16-00751 is not listed on IDEAS
    2. Peter Tillmann, 2003. "Cointegration and Regime-Switching Risk Premia in the U.S. Term Structure of Interest Rates," Bonn Econ Discussion Papers bgse27_2003, University of Bonn, Germany.
    3. Ramos-Tallada, Julio, 2015. "Bank risks, monetary shocks and the credit channel in Brazil: Identification and evidence from panel data," Journal of International Money and Finance, Elsevier, vol. 55(C), pages 135-161.
    4. Kirstin Hubrich & Kenneth D. West, 2010. "Forecast evaluation of small nested model sets," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 25(4), pages 574-594.
    5. Tillmann, Peter, 2007. "Inflation regimes in the US term structure of interest rates," Economic Modelling, Elsevier, vol. 24(2), pages 203-223, March.
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    7. Bjørn-Roger Wilhelmsen & Andrea Zaghini, 2011. "Monetary policy predictability in the euro area: an international comparison," Applied Economics, Taylor & Francis Journals, vol. 43(20), pages 2533-2544.
    8. Sarno, Lucio & Thornton, Daniel L., 2003. "The dynamic relationship between the federal funds rate and the Treasury bill rate: An empirical investigation," Journal of Banking & Finance, Elsevier, vol. 27(6), pages 1079-1110, June.
    9. Todd E. Clark & Michael W. McCracken, 2010. "Reality checks and nested forecast model comparisons," Working Papers 2010-032, Federal Reserve Bank of St. Louis.
    10. repec:eee:finana:v:52:y:2017:i:c:p:1-8 is not listed on IDEAS
    11. Friedrich Heinemann & Katrin Ullrich, 2007. "Does it Pay to Watch Central Bankers’ Lips? The Information Content of ECB Wording," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 143(II), pages 155-185, June.
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    13. PeterTillmann, 2004. "Cointegration and Regime-Switching Risk Premia in the U.S. Term Structure of Interest Rates," Computing in Economics and Finance 2004 53, Society for Computational Economics.
    14. Marco Lippi & Daniel L. Thornton, 2004. "A Dynamic Factor Analysis of the Response of U.S. Interest Rates to News," LEM Papers Series 2004/05, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
    15. Guidolin, Massimo & Timmermann, Allan, 2009. "Forecasts of US short-term interest rates: A flexible forecast combination approach," Journal of Econometrics, Elsevier, pages 297-311.
    16. Caporale, Guglielmo Maria & Gil-Alana, Luis A., 2017. "Persistence and cycles in the us federal funds rate," International Review of Financial Analysis, Elsevier, pages 1-8.
    17. James D. Hamilton, 2007. "Assessing Monetary Policy Effects Using Daily Fed Funds Futures Contracts," NBER Working Papers 13569, National Bureau of Economic Research, Inc.
    18. James D. Hamilton, 2008. "Assessing monetary policy effects using daily federal funds futures contracts," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 377-394.
    19. Kosei Fukuda, 2011. "Cointegration rank switching model: an application to forecasting interest rates," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 30(5), pages 509-522, August.

    More about this item

    Keywords

    E47; federal fund rate; forecasting; nonlinearity; term structure;

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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