Measuring monetary policy expectations from financial market instruments

Michael Joyce (), Jonathan Relleen () and Steffen Sorensen ()
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Michael Joyce: Bank of England, Postal: Bank of England Threadneedle Street London EC2R 8AH
Jonathan Relleen: Bank of England, Postal: Bank of England Threadneedle Street London EC2R 8AH

No 356, Bank of England working papers from Bank of England

Abstract: This paper reviews the main instruments and associated yield curves that can be used to measure financial market participants' expectations of future UK monetary policy rates. We attempt to evaluate these instruments and curves in terms of their ability to forecast policy rates over the period from October 1992, when the United Kingdom first adopted an explicit inflation target, to March 2007. We also investigate several model-based methods of estimating forward term premia, in order to calculate risk-adjusted forward interest rates. On the basis of both in and out-of-sample test results, we conclude that, given the uncertainties involved, it is unwise to rely on any one technique to measure policy rate expectations and that the best approach is to take an inclusive approach, using a variety of methods and information.

Keywords: Interest rates; forecasting; term premia (search for similar items in EconPapers)
JEL-codes: E43 E44 E52 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-for, nep-mac and nep-mon
Date: 2008-11-24

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Persistent link: http://EconPapers.repec.org/RePEc:boe:boeewp:0356

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