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What can probability forecasts tell us about inflation risks?

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  • García, Juan Angel
  • Manzanares, Andrés
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    Abstract

    A crucial but often ignored element of inflation expectations is the amount of perceived inflation risk. This paper estimates the degree of uncertainty and asymmetry in the probability forecasts of the Survey of Professional Forecasters (SPF) using a new methodology. The main conclusion from our analysis is that, when monitoring inflation expectations, limiting attention to a point prediction is not sufficient. The analysis of inflation expectations should take into account inflation risks. As an example, we show that our measures of inflation risks can better explain why inflation scares happened in the bond market during the Volcker disinflation. JEL Classification: C16, C42, E31, E47

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    Bibliographic Info

    Paper provided by European Central Bank in its series Working Paper Series with number 0825.

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    Date of creation: Oct 2007
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    Handle: RePEc:ecb:ecbwps:20070825

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    Related research

    Keywords: inflation expectations; inflation risk; power divergence estimators; skew-normal distribution; Survey of Professional Forecasters (SPF);

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    Cited by:
    1. Gary Koop & Luca Onorante, 2011. "Estimating Phillips Curves in Turbulent Times using the ECBs Survey of Professional Forecasters," Working Papers 1109, University of Strathclyde Business School, Department of Economics.

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