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      Market-based measures of monetary policy expectations

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      Author
      Gürkaynak, R. S.
      Sack, B. P.
      Swanson, E. T.
      Date
      2007
      Source Title
      Journal of Business and Economic Statistics
      Print ISSN
      0735-0015
      Electronic ISSN
      1537-2707
      Publisher
      Taylor & Francis Inc.
      Volume
      25
      Issue
      2
      Pages
      201 - 212
      Language
      English
      Type
      Article
      Item Usage Stats
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      Abstract
      A number of recent articles have used different financial market instruments to measure near-term expectations of the federal funds rate and the high-frequency changes in these instruments around Federal Open Market Committee announcements to measure monetary policy shocks. This article evaluates the empirical success of a variety of financial market instruments in predicting the future path of monetary policy. All of the instruments we consider provide forecasts that are clearly superior to those of standard time series models at all of the horizons considered. Among financial market instruments, we find that federal funds futures dominate all the other securities in forecasting monetary policy at horizons out to six months. For longer horizons, the predictive power of many of the instruments we consider is very similar. In addition, we present evidence that monetary policy shocks computed using the current-month federal funds futures contract are influenced by changes in the timing of policy actions that do not influence the expected course of policy beyond a horizon of about six weeks. We propose an alternative shock measure that captures changes in market expectations of policy over slightly longer horizons.
      Keywords
      Federal Reserve
      Futures
      Monetary policy
      Permalink
      http://hdl.handle.net/11693/23496
      Published Version (Please cite this version)
      http://dx.doi.org/10.1198/073500106000000387
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      • Department of Economics 649
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