Forecasting Interest Rates: an application for Brazil

Eduardo Lima (eduardo.lima@bcb.gov.br), Felipe Luduvice and Benjamin Tabak

No 120, Working Papers Series from Central Bank of Brazil, Research Department

Abstract: Understanding the links between long and short-term interest rates is crucial for monetary policy makers, since Central Banks decide and set short-term interest rates in order to affect indirectly long-term interest rates, which affects aggregate spending. This paper studies whether VAR/VEC models are useful in predicting long-term interest rates for Brazil. The empirical results suggest that these models are useful in building qualitative scenarios for the Term structure of interest rates, but do not provide good forecasts in terms of accuracy. Furthermore, models that assume that the future path of short-term interest rates (target interest rates) is known by forecasters do not perform better in terms of both directional and forecasting accuracy.

Date: 2006-10
New Economics Papers: this item is included in nep-for, nep-mac and nep-mon
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