Document Type

Article

Publication Date

2017

Publication Title

Economics Bulletin

Volume

37

Issue Number

4

First Page

2767

Last Page

2796

Keywords

effective federal funds rate, google search, internet search, investor attention, online search, federal reserve, federal rate, federal funds rate, investor, sentiment, anticipation, forecast, prediction

Disciplines

Economics | Finance

Abstract

In this article we study if investor's sentiment measured by an intensity of Google searches may be used to predict future changes of the Effective Federal Funds rate. We find that online searches for “fed funds rate”, “fed interest rate”, “fed reserve”, “fed reserve rate” and “federal interest rate” are associated with next week decrease of the Effective Federal Funds Rate. Google searches for “fed rate hike” and “fed raise rates” are associated with next week increase of the Effective Federal Funds Rate even after we control for a number of macroeconomic indicators. We also find that intensity of Google searches is associated with the future decrease of volatility of the Effective Federal Funds rate. This finding can be explained by the reduction of information asymmetry about future changes that leads to a reduced volatility.

Comments

This article was originally published in Economics Bulletin, volume 37, issue 4, 2017, and can also be found online at this link.

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