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The article presents a newly developed Qual Vector Autoregression (VAR) model, which uses the business cycle turning point index for forecasting of the different macroeconomic variables. The model is shown to be much more accurate in out-of sample forecasts, as compared to the conventional VAR approach.

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jbankfin.2006.03.002 Byline: Michael Dueker, Christopher J. Neely Keywords: Technical trading rules; Markov switching; Exchange rates; Excess returns; Predictability Abstract: This paper merges the literature on technical trading rules with the literature on Markov switching to develop economically useful trading rules. The Markov models' out-of-sample, excess returns modestly exceed those of standard technical rules and are profitable over the most recent subsample. A portfolio of Markov and standard technical rules outperforms either set individually, on a risk-adjusted basis. The Markov rules' high excess returns contrast with mixed performance on statistical tests of forecast accuracy. There is no clear source for the trends, but permitting the mean to depend on higher moments of the exchange rate distribution modestly increases returns. Author Affiliation: Research Department, Federal Reserve Bank of St. Louis, Federal Reserve System, P.O. Box 442, St. Louis, MO 63166, United States Article History: Received 28 August 2004; Accepted 24 March 2006

Ten years of empirical studies of inflation targeting have not uncovered clear evidence that monetary policy that incorporates formal targets imparts better inflation performance. The authors survey the literature and [...]

Gaps between output and employment growth are often attributed to transitional phases by which the economy adjusts to shifts in the rate of trend productivity growth. Nevertheless, cyclical factors can [...]

Many estimated macroeconomic models assume interest rate smoothing in the monetary policy equation. In practice, monetary policymakers adjust a target level for the federal funds rate by discrete increments. One [...]

In macroeconomic models with monthly or quarterly data, it is common to assume that variables--such as output, investment, and inflation--respond to the monthly or quarterly average of the daily federal [...]

The Chicago Board Options Exchange listed both American-style and European-style options on Standard and Poor's 500 Index during the period of April 2, 1986 to June 20, 1986. This study uses the asking quotes of that time to directly measure the early exercise premiums of American-style index options, creating a matched-pair sampling of ask and bid quotes for identical European and American options

Business recessions, as a major source of nondiversifiable risk, impose high costs on society. Since firms cannot obtain 'recession insurance,' they try to foresee recessions and reduce their exposure ahead [...]

Empirical studies in macroeconomics--according to Stock and Watson (2001)--focus on one or more of the following: (i) describing macroeconomic data, (ii) forecasting macroeconomic data, (iii) quantifying the sources of macroeconomic [...]

Economic theory suggests that monetary policy tends to have an inflationary bias when monetary policy is discretionary (Barra and Gordon, 1983). This bias can be eliminated if the monetary authority [...]

In the minutes of its December 17, 1996 meeting, the Federal Open Market Committee (FOMC) described its policy stance as one of 'watchful waiting.' In the second half of that [...]

What is the message from stock and bond markets about the likelihood of a recession within the next year?' Monetary policymakers must examine such questions as part of a look-at-everything [...]

The adjusted monetary base has long been an index measure that aggregates the effects of Federal Reserve open-market operations, discount window lending and reserve-requirement changes. Traditionally the adjustment procedure has [...]

For U.S. monetary policy, 1994 was an eventful year. Despite little change in measured price inflation, expectations of inflation began increasing in late 1993, as interest rates on 10-year government [...]

Money supply measures are considered indicators of the effects of monetary policy on the general price level. The US Federal Reserve Board partially controls the movements of these measures, called monetary aggregates, through the federal funds rate. Using these aggregates as monetary targets gives rise to issues of indicator quality on ease of control. An analysis of the performance of different monetary aggregates as targets reveals that M1 is the measure that results in the smallest forecast error. Moreover, control error is shown to be as significant as velocity error.

A FREQUENTLY CITED THEORETICAL framework for the conduct of monetary policy consists of a policy instrument, an intermediate policy target and a long-run policy objective. The policy instrument is a [...]

THE HYPOTHESIS THAT the purchasing power of a given currency, like the dollar, will be equal across countries has strong appeal. If the hypothesis is true, then inflation and exchange [...]

The Federal Reserve has shown that it would support making price stability the explicit goal of monetary policy.(1) How to accomplish this, however, is a matter of considerable discussion. Some [...]

IT IS WELL-ESTABLISHED that discount rate changes of the same size can have markedly different effects on market interest rates. Studies of such effects, starting with Thornton (1982), have generally [...]