Measuring monetary policy expectations

Vijay A Murik

Australian Journal of Management, 2013, vol. 38, issue 1, 49-65

Abstract: We evaluate the accuracy of the fixed-income market in pricing for future movements in monetary policy. Yields implied by market pricing on various fixed-income securities are regressed on returns on the cash rate over corresponding periods. Where the market pricing is subject to risk premia, instrumental variables are used to strip away the effects of the risk premia as if they were measurement errors. When we apply our framework to Australian fixed-income pricing from 2004 to 2010, we find that, consistent with findings in the extant literature, the market is quite effective in forecasting cash rate movements over horizons of up to six months. Beyond that horizon, the presence of risk premia diminishes to a large extent the signal on expectations in market pricing, but our instrumental variables framework suggests, nonetheless, that there is important information in fixed-income market pricing regarding expected cash rate movements over the one to three-year horizon. JEL Classification: E43, G12

Keywords: Fixed-income pricing; monetary policy expectations (search for similar items in EconPapers)
Date: 2013
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Persistent link: https://EconPapers.repec.org/RePEc:sae:ausman:v:38:y:2013:i:1:p:49-65

DOI: 10.1177/0312896212445521

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