Biases in Monetary Policy Expectations Extracted From Fed Funds Futures and Surveys
July 2007
Hibiki Ichiue*1
Tomonori Yuyama*2
Click on wp07e15.pdf to download the full text.
Abstract
The literature estimates the risk premia in the federal funds futures rates to extract market expectations of monetary policy by assuming that the forecast errors of the market expectations are zero on average, or that survey forecasts are good proxies for market expectations. These assumptions, however, may fail due to an unanticipated downtrend of the federal funds rate over the available sample or strategic behavior of survey respondents. Consequently, the two estimated premia under these assumptions may be biased upward and downward, respectively. We propose an alternative measure of premium, which has been negative on average since 2004.
We would like to thank Naohiko Baba, Keiji Kono, and the staff of the Bank of Japan for their helpful comments. The views expressed here are ours alone, and do not necessarily reflect those of the Bank of Japan.
- *1 Economist and Deputy Director, Financial Markets Department, Bank of Japan
e-mail: hibiki.ichiue@boj.or.jp - *2 Economist, Financial Markets Department, Bank of Japan
e-mail: tomonori.yuyama@boj.or.jp
Notice
Papers in the Bank of Japan Working Paper Series are circulated in order to stimulate discussion and comments. Views expressed are those of authors and do not necessarily reflect those of the Bank.
If you have any comment or question on the working paper series, please contact each author.
When making a copy or reproduction of the content for commercial purposes, please contact the Public Relations Department (webmaster@info.boj.or.jp) at the Bank in advance to request permission. When making a copy or reproduction, the source, Bank of Japan Working Paper Series, should explicitly be credited.