Measuring monetary policy expectations from financial market instruments

Michael Joyce, Jonathan Relleen and Steffen Sorensen

No 978, Working Paper Series from European Central Bank

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. JEL Classification: E43, E44, E52

Keywords: forecasting; interest rates; term premia (search for similar items in EconPapers)
Date: 2008-12
Note: 2595529
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (23)

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Working Paper: Measuring monetary policy expectations from financial market instruments (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:2008978

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