Forward Rates, Monetary Policy and the Economic Cycle

35 Pages Posted: 1 Mar 2011 Last revised: 24 Jan 2017

See all articles by Florian Ielpo

Florian Ielpo

Université Paris I Panthéon-Sorbonne - Centre d'Economie de la Sorbonne (CES); Unigestion

Date Written: March 7, 2011

Abstract

The short end of the yield curve incorporates essential pieces of information to forecast the next decisions of Central Banks, but in a biased manner. I therefore propose a new method to forecast the Fed and the ECB decision rate by correcting the swap rates for their cyclical economic premium, using an affine term structure model. The corrected yields offer a higher out-of-sample forecasting power than the yields themselves. They also deliver forecast that are either comparable or better than those obtained with a Factor Augmented VAR, underlying the fact that yields are likely to contain at least as much information regarding monetary policy as in a pure economic dataset.

Keywords: risk premium, affine models, FAVAR, Central Bank forecasting, forward rates

JEL Classification: C53, E44, E47

Suggested Citation

Ielpo, Florian, Forward Rates, Monetary Policy and the Economic Cycle (March 7, 2011). Available at SSRN: https://ssrn.com/abstract=1773215 or http://dx.doi.org/10.2139/ssrn.1773215

Florian Ielpo (Contact Author)

Université Paris I Panthéon-Sorbonne - Centre d'Economie de la Sorbonne (CES) ( email )

106-112 Boulevard de l'hopital
106-112 Boulevard de l'Hôpital
Paris Cedex 13, 75647
France

Unigestion ( email )

8c, avenue de Champel CP 387
CP 387
Genève 12, CH 1211
Switzerland

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