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Forecasts of U.S. short-term interest rates: a flexible forecast combination approach

  • Massimo Guidolin
  • Allan Timmerman

This paper develops a flexible approach to combine forecasts of future spot rates with forecasts from time-series models or macroeconomic variables. We find empirical evidence that accounting for both regimes in interest rate dynamics and combining forecasts from different models helps improve the out-of-sample forecasting performance for US short-term rates. Imposing restrictions from the expectations hypothesis on the forecasting model are found to help at long forecasting horizons.

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Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2005-059.

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Date of creation: 2007
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Handle: RePEc:fip:fedlwp:2005-059
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