Measuring Monetary Policy Expectations from Financial Market Instruments

Bank of England Working Paper No. 356

ECB Working Paper No. 978

51 Pages Posted: 23 Dec 2008

See all articles by Michael Joyce

Michael Joyce

Bank of England - Monetary Analysis

Jonathan Relleen

Bank of England

Steffen Sorensen

Moody's Investor Services

Date Written: December 3, 2008

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.

Keywords: Interest rates, forecasting, term premia

JEL Classification: E43, E44, E52

Suggested Citation

Joyce, Michael and Relleen, Jonathan and Sorensen, Steffen, Measuring Monetary Policy Expectations from Financial Market Instruments (December 3, 2008). ECB Working Paper No. 978; ECB Working Paper No. 978. Available at SSRN: https://ssrn.com/abstract=1310614

Michael Joyce (Contact Author)

Bank of England - Monetary Analysis ( email )

Threadneedle Street
London EC2R 8AH
United Kingdom
44 (0)207 601 4444 (Phone)

HOME PAGE: http://www.bankofengland.co.uk

Jonathan Relleen

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Steffen Sorensen

Moody's Investor Services

New York, NY 10007
United States

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