Market-Based Measures of Monetary Policy Expectations

Federal Reserve Bank of San Francisco Working Paper No. 2006-04

FEDS Working paper 2002-40

36 Pages Posted: 25 Nov 2002

See all articles by Refet S. Gürkaynak

Refet S. Gürkaynak

Bilkent University - Department of Economics

Brian P. Sack

Board of Governors of the Federal Reserve - Monetary and Financial Market Analysis Section

Eric T. Swanson

University of California, Irvine - Department of Economics

Date Written: January 2006

Abstract

A number of recent papers 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 FOMC announcements to measure monetary policy shocks. This paper 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: monetary policy, federal funds rate, financial markets

JEL Classification: E52, G14

Suggested Citation

Gürkaynak, Refet S. and Sack, Brian P. and Swanson, Eric T., Market-Based Measures of Monetary Policy Expectations (January 2006). Federal Reserve Bank of San Francisco Working Paper No. 2006-04, FEDS Working paper 2002-40, Available at SSRN: https://ssrn.com/abstract=333640 or http://dx.doi.org/10.2139/ssrn.333640

Refet S. Gürkaynak (Contact Author)

Bilkent University - Department of Economics ( email )

06533 Ankara
Turkey

Brian P. Sack

Board of Governors of the Federal Reserve - Monetary and Financial Market Analysis Section ( email )

20th and C Streets, NW
Washington, DC 20551
United States
202-736-5671 (Phone)
202-452-2301 (Fax)

Eric T. Swanson

University of California, Irvine - Department of Economics ( email )

University of California, Irvine
3151 Social Science Plaza
Irvine, CA 92697-5100
United States
(949) 824-8305 (Phone)

HOME PAGE: http://www.ericswanson.org

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