A Monetary Policy Rule Based on Nominal and Inflation-indexed Treasury Yield

2003 ◽  
Author(s):  
Brian P. Sack
Keyword(s):  
Monetary Policy ◽  
Policy Rule ◽  
Rule Based ◽  
Monetary Policy Rule

Monetary-Policy Rule as a Bridge: Predicting Inflation without Predictive Regressions

2018 ◽  
Vol 53 (6) ◽  
pp. 2559-2586 ◽  
Author(s):  
Jian Hua ◽  
Liuren Wu
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Interest Rates ◽  
Historical Analysis ◽  
Policy Rule ◽  
Estimation Errors ◽  
Predictive Regressions ◽  
Inflation Rates ◽  
Monetary Policy Rule ◽  
Out Of Sample

A major issue with predicting inflation rates using predictive regressions is that estimation errors can overwhelm the information content. This article proposes a new approach that uses a monetary-policy rule as a bridge between inflation rates and short-term interest rates and relies on the forward-interest-rate curve to predict future interest-rate movements. The 2-step procedure estimates the predictive relation not through a predictive regression but far more accurately through the contemporaneous monetary-policy linkage. Historical analysis shows that the approach outperforms random walk out of sample by 30%–50% over horizons from 1 to 5 years.

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