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Federal Reserve Bank of St. Louis
Working Papers
Forecasts of U.S. short-term interest rates: a flexible forecast combination approach
Massimo Guidolin
Allan Timmerman
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.


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Massimo Guidolin & Allan Timmerman, Forecasts of U.S. short-term interest rates: a flexible forecast combination approach, Federal Reserve Bank of St. Louis, Working Papers 2005-059, 2007.
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Keywords: Interest rates ; Forecasting
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