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Board of Governors of the Federal Reserve System (US)
Finance and Economics Discussion Series
Market-based measures of monetary policy expectations
Refet S. Gürkaynak
Brian P. Sack
Eric T. Swanson
Abstract

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 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 alternative shock measures that capture changes in market expectations of policy over slightly longer horizons.


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Refet S. Gürkaynak & Brian P. Sack & Eric T. Swanson, Market-based measures of monetary policy expectations, Board of Governors of the Federal Reserve System (US), Finance and Economics Discussion Series 2002-40, 2002.
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Keywords: Monetary policy
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