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Does the euro area forward rate provide accurate forecasts of the short rate?

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  • Galvao, Ana Beatriz
  • Costa, Sonia

Abstract

The forward rate can deliver accurate forecasts of euro area short-term interest rates, depending on the time period. During periods of macroeconomic uncertainty, forecasts obtained from a model of yield and macro factors are more accurate than forward-based forecasts. We provide evidence that a time-varying forward premium explains the variation in the forecasting performance. We develop a method for computing forward premium confidence intervals to identify ex-ante periods during which forward-based forecasts are inaccurate.

Suggested Citation

  • Galvao, Ana Beatriz & Costa, Sonia, 2013. "Does the euro area forward rate provide accurate forecasts of the short rate?," International Journal of Forecasting, Elsevier, vol. 29(1), pages 131-141.
    • Handle: RePEc:eee:intfor:v:29:y:2013:i:1:p:131-141
    DOI: 10.1016/j.ijforecast.2012.07.003
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    2. Giuseppe Arbia & Michele Di Marcantonio, 2015. "Forecasting Interest Rates Using Geostatistical Techniques," Econometrics, MDPI, vol. 3(4), pages 1-28, November.

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