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Predicting monetary policy using artificial neural networks

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  • Hinterlang, Natascha

Abstract

This paper analyses the forecasting performance of monetary policy reaction functions using U.S. Federal Reserve's Greenbook real-time data. The results indicate that artificial neural networks are able to predict the nominal interest rate better than linear and nonlinearTaylor rule models as well as univariate processes. While in-sample measures usually imply a forward-looking behaviour of the central bank, using nowcasts of the explanatory variables seems to be better suited for forecasting purposes. Overall, evidence suggests that U.S. monetary policy behaviour between1987-2012 is nonlinear.

Suggested Citation

  • Hinterlang, Natascha, 2020. "Predicting monetary policy using artificial neural networks," Discussion Papers 44/2020, Deutsche Bundesbank.
    • Handle: RePEc:zbw:bubdps:442020
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    Cited by:

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    2. Martin Baumgaertner & Johannes Zahner, 2021. "Whatever it takes to understand a central banker - Embedding their words using neural networks," MAGKS Papers on Economics 202130, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    3. Daniel Stempel & Johannes Zahner, 2022. "DSGE Models and Machine Learning: An Application to Monetary Policy in the Euro Area," MAGKS Papers on Economics 202232, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).

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    More about this item

    Keywords

    Forecasting; Monetary Policy; Artificial Neural Network; Taylor Rule; Reaction Function;
    All these keywords.

    JEL classification:

    • C45 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Neural Networks and Related Topics
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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