Market-Based Measures of Monetary Policy Expectations

By R. Gürkaynak, Brian P. Sack, Eric T. Swanson. 2002

383 citations recorded by the source corpus.

A number of recent articles 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 Federal Open Market Committee announcements to measure monetary policy shocks. This article 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.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/da405c05fff92c86b906b5c3fe2fc35e3b486a26

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Citations in the corpus

The excess sensitivity of long-term interest rates: evidence and implications for macroeconomic models (2003, background): “One small complication arises in the timing of the shocks: since 12 Gürkaynak, Sack, and Swanson (2002) find that, among many financial market instruments that potentially reflect expectations of monetary policy, federal funds futures are the best predictor of future policy actions.”
How Useful Are Estimated DSGE Model Forecasts for Central Bankers? (2010, neutral): “14862 [14] Gürkaynak, R.”
The impact of the ECB's conventional and unconventional monetary policies on stock markets (2016, background): “A useful further study could be to compare the performances of alternative futures prices in measuring the policy expectations for the ECB, in line with Gurkaynak et al. (2007), and try alternative measures of expectations in event study regressions.”
Do actions speak louder than words? the response of asset prices to monetary policy actions and statements (2004, background): “…matrix Z by Z = FU, (A8) 30Gürkaynak (2005) discusses measuring policy expectations and surprises at horizons farther ahead than the current meeting; Gürkaynak, Sack, and Swanson (2002) show that federal funds futures are the best financial market predictors of the federal funds rate with the…”
Macroeconomic Cycles and the Stock Market's Reaction to Monetary Policy (2008, neutral): “Swanson (2006) and Gurkaynak et al. (2007) argue that the fed funds futures rate became a better predictor of the future target rate after this change in disclosure policy.”
Are Sticky Prices Costly? Evidence from the Stock Market (2016, neutral): “In similar spirit, Guerkaynak et al. (2007) provide evidence that the federal funds futures dominate other market based instruments in forecasting the federal funds rate.”
Have Increases in Federal Reserve Transparency Improved Private Sector Interest Rate Forecasts? (2006, background): “See Gürkaynak, Sack, and Swanson (2006) for details.”
High Frequency Identification of Monetary Non-Neutrality: The Information Effect (2018, positive): “To measure movements in Treasuries at horizons of one year or more, we use daily data on zero-coupon nominal Treasury yields and instantaneous forward rates constructed by Gürkaynak, Sack, and Swanson (2007).”
Investor Sentiment and the Stock Market’s Reaction to Monetary Policy (2010, neutral): “Gurkaynak (2005) and Gurkaynak et al. (2007) present a decomposition of the aggregate monetary surprises into two parts, the level (permanent) surprise and the timing (transitory) surprise.”