Which Model to Forecast the Target Rate?

40 Pages Posted: 2 Mar 2011 Last revised: 16 Dec 2017

Bruno Feunou

Bank of Canada

Jean-Sebastien Fontaine

Bank of Canada

Jianjian Jin

Government of Canada - Bank of Canada

Date Written: December 1, 2017

Abstract

Specifications of the Federal Reserve target rate that have more realistic features mitigate in-sample over-fitting and are favored in the data. Imposing a positivity constraint and discrete increments significantly increase the accuracy of model out-of-sample forecasts for the level and volatility of the Federal Reserve target rates. In addition, imposing the constraints produces different estimates of the response coefficients. In particular, a new and simple specification where the target rate is the maximum between zero and the prediction of an ordered-choice Probit model is more accurate and has higher response coefficients to information about inflation and unemployment.

Keywords: Monetary policy, Zero Lower Bound, Non-linear dynamics

JEL Classification: C13, C32, E43, E44, G12

Suggested Citation

Feunou, Bruno and Fontaine, Jean-Sebastien and Jin, Jianjian, Which Model to Forecast the Target Rate? (December 1, 2017). Available at SSRN: https://ssrn.com/abstract=1772971 or http://dx.doi.org/10.2139/ssrn.1772971

Bruno Feunou (Contact Author)

Bank of Canada ( email )

234 Wellington Street
Ottawa, Ontario K1A 0G9
Canada
613-782-8302 (Phone)

HOME PAGE: http://kamkui.net/

Jean-Sebastien Fontaine

Bank of Canada ( email )

234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada

HOME PAGE: http://www.jean-sebastienfontaine.com

Jianjian Jin

Government of Canada - Bank of Canada ( email )

234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada

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