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We develop a model to forecast the Federal Open Market Committee's (FOMC's) interest rate setting behavior in a nonstationary discrete choice model framework by Hu and Phillips (2004). We find that if the model selection criterion is strictly empirical, correcting for nonstationarity is extremely important, whereas it may not be an issue if one has an a priori model. Evaluating an array of models in terms of their out-of-sample forecasting ability, we find that those favored by the in-sample criteria perform worst, while theory-based models perform best. We find the best model for forecasting the FOMC's behavior is a forward-looking Taylor rule model. Copyright © 2008 John Wiley & Sons, Ltd.

This paper provides additional evidence on life‐cycle patterns of relative risk aversion, using spline functions generated on Consumer Expenditure Survey data. Human capital is hypothesized to affect relative risk aversion; age has been used in previous work as a proxy for human capital. The objective of this study is to determine whether there is a life‐cycle pattern that is independent of the effect of human capital. The results suggest an affirmative answer. Moreover, this independent life‐cycle pattern is the opposite of that estimated in a previous study that used age as a proxy.

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