Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/87203
Authors: 
van den Hauwe, Sjoerd
van Dijk, Dick
Paap, Richard
Year of Publication: 
2011
Series/Report no.: 
Tinbergen Institute Discussion Paper 11-093/4
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.
Subjects: 
Federal funds target rate
real-time forecasting
dynamic ordered probit
variable selection
Bayesian analysis
importance sampling
JEL: 
E52
E58
C25
C11
C53
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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