Working Paper: CEPR ID: DP1556
Authors: Paul Soderlind; Lars E. O. Svensson
Abstract: This paper is a selective survey of new or recent methods to extract information about market expectations from asset prices for monetary policy purposes. Traditionally, interest rates and forward exchange rates have been used to extract expected means of future interest rates, exchange rates and inflation. More recently, these methods have been refined to rely on implied forward interest rates, so as to extract expected future time-paths. Very recently, methods have been designed to extract not only the means, but also the whole (risk neutral) probability distribution from a set of option prices.
Keywords: interest rates; exchange rates; inflation; options; forward rate curve; risk neutral distribution
JEL Codes: E43; E52; G13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Asset Prices (G19) | Market Expectations of Future Interest Rates (E43) |
| Asset Prices (G19) | Market Expectations of Inflation (E31) |
| Market Expectations of Future Interest Rates (E43) | Monetary Policy Actions (E52) |
| Market Expectations of Inflation (E31) | Monetary Policy Actions (E52) |