Which Model to Forecast the Target Rate?

Maarten van Oordt

Staff Working Papers from Bank of Canada

Abstract: Specifications of the Federal Reserve target rate that have more realistic features mitigate in-sample over-fitting and are favored in the data. Imposing a positivity constraint and discrete increments significantly increases the accuracy of model out-of-sample forecasts for the level and volatility of the Federal Reserve target rates. In addition, imposing the constraints produces different estimates of the response coefficients. In particular, a new and simple specification, where the target rate is the maximum between zero and the prediction of an ordered-choice Probit model, is more accurate and has higher response coefficients to information about inflation and unemployment.

Keywords: Financial markets; Interest rates (search for similar items in EconPapers)
JEL-codes: E43 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2017
New Economics Papers: this item is included in nep-cba, nep-for, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:17-60

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