DP4587 Federal Funds Rate Prediction
Author(s): | Lucio Sarno, Daniel L Thornton, Giorgio Valente |
Publication Date: | September 2004 |
Keyword(s): | E47, federal fund rate, forecasting, nonlinearity, term structure |
JEL(s): | E43 |
Programme Areas: | International Macroeconomics |
Link to this Page: | cepr.org/active/publications/discussion_papers/dp.php?dpno=4587 |
We examine the forecasting performance of a range of time-series models of the daily US effective federal funds (FF) rate recently proposed in the literature. We find that: (i) most of the models and predictor variables considered produce satisfactory one-day-ahead forecasts of the FF rate; (ii) the best forecasting model is a simple univariate model where the future FF rate is forecast using the current difference between the FF rate and its target; (iii) combining the forecasts from various models generally yields modest improvements on the best performing model. These results have a natural interpretation and clear policy implications.