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Market-based measures of monetary policy expectations

  • Refet S. Gürkaynak
  • Brian Sack
  • Eric Swanson

A number of recent papers have used short-maturity financial instruments to measure expectations of the future course of monetary policy, and have used high-frequency changes in these instruments around FOMC dates to measure monetary policy shocks. This paper evaluates the empirical success of a variety of market instruments in predicting the future path of monetary policy. We find that federal funds futures dominate other market-based measures of monetary policy expectations at horizons out several months. For longer horizons, the predictive power of many of the instruments considered is very similar. In addition, we present evidence that monetary policy shocks computed using the current-month federal funds futures contract are influenced by changes in the timing of policy actions that do not influence the expected course of policy beyond a horizon of about six weeks. We propose alternative shock measures that capture changes in market expectations of policy over slightly longer horizons.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2002-40.

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Date of creation: 2002
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Handle: RePEc:fip:fedgfe:2002-40
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  1. Rudebusch, Glenn D, 1998. "Do Measures of Monetary Policy in a VAR Make Sense?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 907-31, November.
  2. Ben S. Bernanke & Ilian Mihov, 1995. "Measuring Monetary Policy," NBER Working Papers 5145, National Bureau of Economic Research, Inc.
  3. Ulf Söderström, 2001. "Predicting monetary policy with federal funds futures prices," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 21(4), pages 377-391, 04.
  4. John H. Cochrane & Monika Piazzesi, 2002. "The Fed and Interest Rates: A High-Frequency Identification," NBER Working Papers 8839, National Bureau of Economic Research, Inc.
  5. Chris Downing & Stephen Oliner, 2004. "The term structure of commercial paper rates," Finance and Economics Discussion Series 2004-18, Board of Governors of the Federal Reserve System (U.S.).
  6. John C. Robertson & Ellis W. Tallman, 1999. "Improving forecasts of the federal funds rate in a policy model," FRB Atlanta Working Paper No. 99-3, Federal Reserve Bank of Atlanta.
  7. Ben S. Bernanke & Kenneth N. Kuttner, 2005. "What Explains the Stock Market's Reaction to Federal Reserve Policy?," Journal of Finance, American Finance Association, vol. 60(3), pages 1221-1257, 06.
  8. Brunner, Allan D, 2000. "On the Derivation of Monetary Policy Shocks: Should We Throw the VAR Out with the Bath Water?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(2), pages 254-79, May.
  9. Sims, Christopher A & Zha, Tao, 1998. "Bayesian Methods for Dynamic Multivariate Models," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 949-68, November.
  10. Rudebusch, Glenn D., 2002. "Term structure evidence on interest rate smoothing and monetary policy inertia," Journal of Monetary Economics, Elsevier, vol. 49(6), pages 1161-1187, September.
  11. William Poole & Robert H. Rasche, 2000. "Perfecting the market's knowledge of monetary policy," Working Papers 2000-010, Federal Reserve Bank of St. Louis.
  12. Clemon, Robert T & Winkler, Robert L, 1986. "Combining Economic Forecasts," Journal of Business & Economic Statistics, American Statistical Association, vol. 4(1), pages 39-46, January.
  13. Lange, Joe & Sack, Brian & Whitesell, William, 2003. " Anticipations of Monetary Policy in Financial Markets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(6), pages 889-909, December.
  14. Refet S. Gürkaynak & Brian Sack & Eric Swanson, 2002. "Market-based measures of monetary policy expectations," Finance and Economics Discussion Series 2002-40, Board of Governors of the Federal Reserve System (U.S.).
  15. Monika Piazzesi & Eric T. Swanson, 2006. "Futures prices as risk-adjusted forecasts of monetary policy," Working Paper Series 2006-23, Federal Reserve Bank of San Francisco.
  16. Refet S. Gürkaynak, 2005. "Using federal funds futures contracts for monetary policy analysis," Finance and Economics Discussion Series 2005-29, Board of Governors of the Federal Reserve System (U.S.).
  17. John B. Carlson & Jean M. McIntire & James B. Thomson, 1995. "Federal funds futures as an indicator of future monetary policy: a primer," Economic Review, Federal Reserve Bank of Cleveland, issue Q I, pages 20-30.
  18. Kenneth N. Kuttner, 2000. "Monetary policy surprises and interest rates: evidence from the Fed funds futures markets," Staff Reports 99, Federal Reserve Bank of New York.
  19. Joel T. Krueger & Kenneth N. Kuttner, 1995. "The Fed funds futures rate as a predictor of Federal Reserve policy," Working Paper Series, Macroeconomic Issues 95-4, Federal Reserve Bank of Chicago.
  20. Joel T. Krueger & Kenneth N. Kuttner, 1996. "The Fed funds futures rate as a predictor of federal reserve policy," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 16(8), pages 865-879, December.
  21. Charles L. Evans, 1998. "Real-time Taylor rules and the federal funds futures market," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q III, pages 44-55.
  22. Jon Faust & Eric Swanson & and Jonathan H. Wright, 2002. "Identifying vars based on high frequency futures data," International Finance Discussion Papers 720, Board of Governors of the Federal Reserve System (U.S.).
  23. Ellingsen, Tore & Söderström, Ulf, 1998. "Monetary Policy and Market Interest Rates," SSE/EFI Working Paper Series in Economics and Finance 242, Stockholm School of Economics, revised 08 Mar 1999.
  24. Roberto Rigobon & Brian P. Sack, 2002. "The Impact of Monetary Policy on Asset Prices," NBER Working Papers 8794, National Bureau of Economic Research, Inc.
  25. John C. Robertson & Daniel L. Thornton, 1997. "Using federal funds futures rates to predict Federal Reserve actions," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 45-53.
  26. Brian Sack, 2004. "Extracting the Expected Path of Monetary Policy From Futures Rates," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 24(8), pages 733-754, 08.
  27. Bomfim, Antulio N., 2003. "Pre-announcement effects, news effects, and volatility: Monetary policy and the stock market," Journal of Banking & Finance, Elsevier, vol. 27(1), pages 133-151, January.
  28. Söderström, Ulf, 1999. "Predicting monetary policy using federal funds futures prices," SSE/EFI Working Paper Series in Economics and Finance 307, Stockholm School of Economics.
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