Template-Type: ReDIF-Paper 1.0 Series: Tinbergen Institute Discussion Papers Creation-Date: 2011-07-15 Number: 11-093/4 Author-Name: Sjoerd van den Hauwe Author-Workplace-Name: Erasmus University Rotterdam Author-Name: Dick van Dijk Author-Workplace-Name: Erasmus University Rotterdam Author-Name: Richard Paap Author-Workplace-Name: Erasmus University Rotterdam Title: Bayesian Forecasting of Federal Funds Target Rate Decisions 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 hitrate 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.

This discussion paper resulted in an article in the Journal of Macroeconomics (2013). Volume 37, pages 19-40. Classification-JEL: E52, E58, C25, C11, C53 Keywords: Federal funds target rate, real-time forecasting, dynamic ordered probit, variable selection, Bayesian analysis, importance sampling File-Url: https://papers.tinbergen.nl/11093.pdf File-Format: application/pdf File-Size: 510320 bytes Handle: RePEc:tin:wpaper:20110093