Working Paper

Forecasts of U.S. short-term interest rates: a flexible forecast combination approach

Abstract: This paper develops a flexible approach to combine forecasts of future spot rates with forecasts from time-series models or macroeconomic variables. We find empirical evidence that accounting for both regimes in interest rate dynamics and combining forecasts from different models helps improve the out-of-sample forecasting performance for US short-term rates. Imposing restrictions from the expectations hypothesis on the forecasting model are found to help at long forecasting horizons.

Keywords: Interest rates; Forecasting;

Bibliographic Information

Provider: Federal Reserve Bank of St. Louis

Part of Series: Working Papers

Publication Date: 2007

Number: 2005-059