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Working Paper
Using federal funds futures contracts for monetary policy analysis
Federal funds futures are popular tools for calculating market-based monetary policy surprises. These surprises are usually thought of as the difference between expected and realized federal funds target rates at the current FOMC meeting. This paper demonstrates the use of federal funds futures contracts to measure how FOMC announcements lead to changes in expected interest rates after future FOMC meetings. Using several 'surprises' at different horizons, timing, level, and slope components of unanticipated policy actions are defined. These three components have differing effects on asset ...
Working Paper
Econometric tests of asset price bubbles: taking stock
Can asset price bubbles be detected? This survey of econometric tests of asset price bubbles shows that, despite recent advances, econometric detection of asset price bubbles cannot be achieved with a satisfactory degree of certainty. For each paper that finds evidence of bubbles, there is another one that fits the data equally well without allowing for a bubble. We are still unable to distinguish bubbles from time-varying or regime-switching fundamentals, while many small sample econometrics problems of bubble tests remain unresolved.
Working Paper
Market-based measures of monetary policy expectations
A number of recent papers have used short-maturity financial instruments to measure expectations of the future course of monetary policy, and have used high-frequency changes in these instruments around FOMC dates to measure monetary policy shocks. This paper evaluates the empirical success of a variety of market instruments in predicting the future path of monetary policy. We find that federal funds futures dominate other market-based measures of monetary policy expectations at horizons out several months. For longer horizons, the predictive power of many of the instruments considered is ...
Working Paper
How useful are estimated DSGE model forecasts?
DSGE models are a prominent tool for forecasting at central banks and the competitive forecasting performance of these models relative to alternatives--including official forecasts--has been documented. When evaluating DSGE models on an absolute basis, however, we find that the benchmark estimated medium scale DSGE model forecasts inflation and GDP growth very poorly, although statistical and judgmental forecasts forecast as poorly. Our finding is the DSGE model analogue of the literature documenting the recent poor performance of macroeconomic forecasts relative to simple naive forecasts ...
Working Paper
The TIPS yield curve and inflation compensation
For over ten years, the U.S. Treasury has issued index-linked debt. Federal Reserve Board staff have fitted a yield curve to these indexed securities at the daily frequency from the start of 1999 to the present. This paper describes the methodology that is used and makes the estimates public. Comparison with the corresponding nominal yield curve allows measures of inflation compensation (or breakeven inflation rates) to be computed. We discuss the interpretation of inflation compensation and its relationship to inflation expectations and uncertainty, offering some empirical evidence that ...
Working Paper
Convergence and anchoring of yield curves in the Euro area
We study the convergence of European bond markets and the anchoring of inflation expectations in euro area countries using high-frequency bond yield data for France, Germany, Italy and Spain. We find that Economic and Monetary Union (EMU) has led to substantial convergence in euro area sovereign bond markets in terms of interest rate levels, unconditional daily fluctuations, and conditional responses to major macroeconomic data announcements. Our findings also suggest a substantial increase in the anchoring of long-term inflation expectations since EMU, particularly for Italy and Spain, which ...
Working Paper
Is optimal monetary policy always optimal?
No. And not only for the reason you think. In a world with multiple inefficiencies the single policy tool the central bank has control over will not undo all inefficiencies; this is well understood. We argue that the world is better characterized by multiple ine?ciencies and multiple policy makers with various objectives. Asking the policy question only in terms of optimal monetary policy effectively turns the central bank into the residual claimant of all policy and gives the other policymakers a free hand in pursuing their own goals. This further worsens the tradeoffs faced by the central ...
Working Paper
Market-based measures of monetary policy expectations
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 ...
Working Paper
Does inflation targeting anchor long-run inflation expectations? evidence from long-term bond yields in the U.S., U.K., and Sweden
We investigate the extent to which inflation targeting helps anchor long-run inflation expectations by comparing the behavior of daily bond yield data in the United Kingdom and Sweden--both inflation targeters--to that in the United States, a non-inflation-targeter. Using the difference between far-ahead forward rates on nominal and inflation-indexed bonds as a measure of compensation for expected inflation and inflation risk at long horizons, we examine how much, if at all, far-ahead forward inflation compensation moves in response to macroeconomic data releases and monetary policy ...
Journal Article
Inflation targeting and the anchoring of inflation expectations in the western hemisphere
We investigate the extent to which long-run inflation expectations are well anchored in three Western Hemisphere countries - Canada, Chile, and the United States - using a high-frequency event-study analysis. Specifically, we use daily data on far-ahead forward inflation compensation - the difference between forward rates on nominal and inflation-indexed bonds - as an indicator of financial market perceptions of inflation risk and the expected level of inflation at long horizons. For the United States, we find that far-ahead forward inflation compensation has reacted significantly to ...