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|
|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.