Which Model to Forecast the Target Rate?
Maarten van Oordt
Staff Working Papers from Bank of Canada
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
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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