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Uncertainty and disagreement in economic forecasting

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  • Stefania D'Amico
  • Athanasios Orphanides

Abstract

Using the probabilistic responses from the Survey of Professional Forecasters, we study the evolution of uncertainty and disagreement associated with inflation forecasts in the United States since 1968. We compare and contrast alternative measures summarizing the distributions of mean forecasts and forecast uncertainty across individuals at an approximate one-year-ahead horizon. In light of the heterogeneity in individual uncertainty reflected in the survey responses, we provide quarterly estimates for both average uncertainty and disagreement regarding uncertainty. We propose direct estimation of parametric distributions characterizing the uncertainty across individuals in a manner that mitigates errors associated with rounding and approximation of responses when individual uncertainty is small. Our results indicate that higher average expected inflation is associated with both higher average inflation uncertainty and greater disagreement about the inflation outlook. Disagreement about the mean forecast, however, may be a weak proxy for forecast uncertainty. We also examine the relationship of these measures with the term premia embedded in the term-structure of interest rates.

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Bibliographic Info

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2008-56.

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Date of creation: 2008
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Handle: RePEc:fip:fedgfe:2008-56

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Related research

Keywords: Inflation (Finance) ; Economic forecasting;

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References

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  1. Fushang Liu & Kajal Lahiri, 2006. "Modelling multi-period inflation uncertainty using a panel of density forecasts," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 21(8), pages 1199-1219.
  2. Robert Rich & Joseph Tracy, 2006. "The relationship between expected inflation, disagreement, and uncertainty: evidence from matched point and density forecasts," Staff Reports 253, Federal Reserve Bank of New York.
  3. Giordani, Paolo & Soderlind, Paul, 2000. "Inflation Forecast Uncertainty," Working Paper Series in Economics and Finance 384, Stockholm School of Economics, revised 09 Oct 2000.
  4. Víctor Gómez & Agustín Maravall, 1998. "Automatic Modeling Methods for Univariate Series," Banco de Espa�a Working Papers 9808, Banco de Espa�a.
  5. Joseph Engelberg & Charles F. Manski & Jared Williams, 2006. "Comparing the Point Predictions and Subjective Probability Distributions of Professional Forecasters," NBER Working Papers 11978, National Bureau of Economic Research, Inc.
  6. Robert Rich & Joseph Tracy, 2003. "Modeling uncertainty: predictive accuracy as a proxy for predictive confidence," Staff Reports 161, Federal Reserve Bank of New York.
  7. Dean Croushore, 1993. "Introducing: the survey of professional forecasters," Business Review, Federal Reserve Bank of Philadelphia, issue Nov, pages 3-15.
  8. Zarnowitz, Victor & Lambros, Louis A, 1987. "Consensus and Uncertainty in Economic Prediction," Journal of Political Economy, University of Chicago Press, vol. 95(3), pages 591-621, June.
  9. Victor Zarnowitz & Louis A. Lambros, 1983. "Consensus and Uncertainty in Economic Prediction," NBER Working Papers 1171, National Bureau of Economic Research, Inc.
  10. Findley, David F, et al, 1998. "New Capabilities and Methods of the X-12-ARIMA Seasonal-Adjustment Program," Journal of Business & Economic Statistics, American Statistical Association, vol. 16(2), pages 127-52, April.
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Cited by:
  1. Berger, Helge & Ehrmann, Michael & Fratzscher, Marcel, 2011. "Geography, skills or both: What explains Fed watchers' forecast accuracy of US monetary policy?," Journal of Macroeconomics, Elsevier, vol. 33(3), pages 420-437, September.
  2. Clements, Michael P, 2012. "Subjective and Ex Post Forecast Uncertainty : US Inflation and Output Growth," The Warwick Economics Research Paper Series (TWERPS) 995, University of Warwick, Department of Economics.
  3. Ehrmann, Michael & Eijffinger, Sylvester & Fratzscher, Marcel, 2010. "The role of central bank transparency for guiding private sector forecasts," Working Paper Series 1146, European Central Bank.
  4. Pacheco, Luis, 2010. "ECB Projections: should leave it to the pros?," Working Papers 11/2010, Universidade Portucalense, Centro de Investigação em Gestão e Economia (CIGE).
  5. Ricco, Giovanni & Callegari, Giovanni & Cimadomo, Jacopo, 2014. "Signals from the Government: Policy Uncertainty and the Transmission of Fiscal Shocks," MPRA Paper 56136, University Library of Munich, Germany.

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