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Predicting Directional Changes in Interest Rates: Gains from Using Information from Monetary Indicators

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  • Tae-Hwan Kima
  • Paul Mizena
  • Alan Thanaset

Abstract

Predicting the likely change to interest rates is not straightforward. Rates can remain unchanged for long periods and new information does not necessarily result in immediate changes. This paper offers a method for predicting rates using a limited dependent variable approach to reflect the decision process. We take three recent theoretical models to consider how regular information on inflation and output gaps might be augmented with monetary information. Our results show that prediction of rate changes improves substantially with the use of supplementary monetary indicators.

Suggested Citation

  • Tae-Hwan Kima & Paul Mizena & Alan Thanaset, 2007. "Predicting Directional Changes in Interest Rates: Gains from Using Information from Monetary Indicators," Discussion Papers 07/07, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
    • Handle: RePEc:not:notcfc:07/07
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