Bayesian Forecasting of Federal Funds Target Rate Decisions

Tinbergen Institute Discussion Paper No. 11-093/4

Posted: 15 Jul 2011

See all articles by Sjoerd van den Hauwe

Sjoerd van den Hauwe

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Dick J. C. van Dijk

Erasmus University Rotterdam - Erasmus School of Economics - Econometric Institute; ERIM

Richard Paap

Erasmus University Rotterdam (EUR) - Department of Econometrics; Tinbergen Institute; Erasmus Research Institute of Management (ERIM)

Date Written: July 13, 2011

Abstract

This paper examines which macroeconomic and financial variables are most informative for the federal funds target rate decisions made by the Federal Open Market Committee (FOMC) from a forecasting perspective. The analysis is conducted for the FOMC decision during the period January 1990 - June 2008, using dynamic ordered probit models with a Bayesian endogenous variable selection methodology and real-time data for a set of 33 candidate predictor variables. We find that indicators of economic activity and forward-looking term structure variables as well as survey measures have most predictive ability. For the full sample period, in-sample probability forecasts achieve a hit rate of 90 percent. Based on out-of-sample forecasts for the period January 2001 - June 2008, 82 percent of the FOMC decisions are predicted correctly.

Keywords: federal funds target rate, real-time forecasting, dynamic ordered probit, variable selection, Bayesian analysis, importance sampling

JEL Classification: E52, E58, C25, C11, C53

Suggested Citation

van den Hauwe, Sjoerd and van Dijk, Dick J.C. and Paap, Richard, Bayesian Forecasting of Federal Funds Target Rate Decisions (July 13, 2011). Tinbergen Institute Discussion Paper No. 11-093/4. Available at SSRN: https://ssrn.com/abstract=1886202

Sjoerd Van den Hauwe (Contact Author)

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

Dick J.C. Van Dijk

Erasmus University Rotterdam - Erasmus School of Economics - Econometric Institute

P.O. Box 1738
3000 DR Rotterdam
Netherlands

ERIM ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands
+31 10 408 1263 (Phone)
+31 10 4089162 (Fax)

HOME PAGE: http://people.few.eur.nl/djvandijk

Richard Paap

Erasmus University Rotterdam (EUR) - Department of Econometrics ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Tinbergen Institute ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Erasmus Research Institute of Management (ERIM) ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

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