Discrete Probability Forecasts: What to expect when you are expecting a monetary policy decision

Alicia Aguilar and Ricardo Gimeno
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Alicia Aguilar: BANCO DE ESPAÑA

No 2438, Working Papers from Banco de España

Abstract: We apply discrete probability forecasts to the expectations of monetary policy rate changes, both in the United States and in the euro area. By using binomial trees from options theory, forecast distributions are derived from the instantaneous forward yield curve, based on interest rate swaps. We then use a non-randomised discrete probability forecast evaluation that confirms the presence of a systematic upward bias, consistent with the presence of a term premium. Consequently, we propose a bias-correction methodology to increase the accuracy of the density forecasts regarding monetary policy expectations. This research provides pivotal insights into understanding and improving predictive tools in monetary policy forecasting.

Keywords: discrete probability forecast; monetary policy decisions; interest rate expectations; binomial tree (search for similar items in EconPapers)
JEL-codes: C53 C58 G12 G17 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2024-10
New Economics Papers: this item is included in nep-ban, nep-cba and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:2438

DOI: 10.53479/37893

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