How informative are interest rate survey-based forecasts?

Abstract

The present paper studies the information content of survey-based predictions for the Brazilian short-term interest rate. We perform vector autoregression analysis to test for the dynamic relationship between interest rates market expectations and spot interest rates, and a single regression forecasting approach. Empirical results suggest that surveys may be useful in assessing market expectations (contain relevant information) and in building Central Bank credibility. Within an inflation-targeting framework they are crucial to receive timely feedback on market sentiment regarding the conduct of monetary policy. We also compare the forecasting accuracy of survey-based expectations of Selic interest rates with econometric models and a random walk model. The results indicate that the survey-based expectations perform better than a random walk model, but the econometric models have more accurate forecasts, especially in longer time horizons.