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A Bivariate Distribution for Inflation and Output Forecasts

Author

Listed:
  • Blix, Mårten

    (Monetary Policy Department, Central Bank of Sweden)

  • Sellin, Peter

    (Monetary Policy Department, Central Bank of Sweden)

Abstract

The contribution of this paper is to derive a bivariate distribution for inflation and output uncertainty with a well-defined role for subjective judgements. The marginal distributions for inflation and output growth are derived from uncertainty in the macro variables that are deemed to be important for future inflation and output growth. The uncertainty in the macro variables is based on their historical standard deviations, but we allow these to be subjectively adjusted if there is reason to be more or less uncertain than historically. We also allow for a subjective assessment of the balance of risk, i.e. whether the distributions are symmetric or not. Given the marginal distributions for inflation and output growth we derive a bivariate distribution using the translation method. Having derived the bivariate distribution we are in a position to discuss inflation forecast uncertainty conditional on the growth of output (or vice versa). The analysis can readily be extended to the case of more than two variables.

Suggested Citation

  • Blix, Mårten & Sellin, Peter, 2000. "A Bivariate Distribution for Inflation and Output Forecasts," Working Paper Series 102, Sveriges Riksbank (Central Bank of Sweden).
    • Handle: RePEc:hhs:rbnkwp:0102
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    File URL: http://www.riksbank.com/upload/3832/WP_102.pdf
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    Citations

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    Cited by:

    1. Maximiano Pinheiro & Paulo Esteves, 2012. "On the uncertainty and risks of macroeconomic forecasts: combining judgements with sample and model information," Empirical Economics, Springer, vol. 42(3), pages 639-665, June.
    2. al-Nowaihi, Ali & Stracca, Livio, 2002. "Non-standard central bank loss functions, skewed risks, and certainty equivalence," Working Paper Series 0129, European Central Bank.
    3. Villani, Mattias & Larsson, Rolf, 2004. "The Multivariate Split Normal Distribution and Asymmetric Principal Components Analysis," Working Paper Series 175, Sveriges Riksbank (Central Bank of Sweden).
    4. Virmani, Vineet, 2004. "Fan Charts as Useful ‘Maps’ for an Inflation-Targeting Central Bank: An Illustration of the Sveriges Riksbank’s Method for Presenting Density Forecasts of Inflation," IIMA Working Papers WP2004-04-03, Indian Institute of Management Ahmedabad, Research and Publication Department.
    5. Berg, Claes & Jansson, Per & Vredin, Anders, 2004. "How Useful are Simple Rules for Monetary Policy? The Swedish Experience," Working Paper Series 169, Sveriges Riksbank (Central Bank of Sweden).
    6. Ohnsorge,Franziska Lieselotte & Stocker,Marc & Some,Modeste Y., 2016. "Quantifying uncertainties in global growth forecasts," Policy Research Working Paper Series 7770, The World Bank.
    7. Ali Al‐Nowaihi & Livio Stracca, 2003. "Behavioural Central Bank Loss Functions, Skewed Risks and Certainty Equivalence," Manchester School, University of Manchester, vol. 71(s1), pages 21-38, September.

    More about this item

    Keywords

    Inflation forecast; Output forecast; Conditional forecasts; Two-piece normal distribution; Translation method; Johnson system;
    All these keywords.

    JEL classification:

    • C19 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Other
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E39 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Other

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