DP14800 Forward interest rates as predictors of future US and UK spot rates before and after the 2008 financial crisis

Author(s): Michael R. Wickens
Publication Date: May 2020
Keyword(s):
JEL(s):
Programme Areas: Financial Economics, Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=14800

A feature of the financial crisis rarely mentioned in the academic literature is that forward interest rates remained persistently higher than future spot rates. Yet according to the expectations hypothesis forward interest rates are unbiased predictors of future spot rates. More general theories attribute the forecast errors to term premia. This paper examines whether these theories can explain data for the US and UK that spans the financial crisis and whether alternative approaches provide better forecasts. The main findings are that these theories break down after the financial crisis and, not unexpectedly, that the forecast errors are due mainly to monetary policy.