A Bivariate Distribution for Inflation and Output Forecasts
AbstractThe 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.
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Bibliographic InfoPaper provided by Sveriges Riksbank (Central Bank of Sweden) in its series Working Paper Series with number 102.
Length: 30 pages
Date of creation: 01 Feb 2000
Date of revision:
Inflation forecast; Output forecast; Conditional forecasts; Two-piece normal distribution; Translation method; Johnson system;
Find related papers by 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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2001-10-16 (All new papers)
- NEP-CBA-2001-10-16 (Central Banking)
- NEP-ETS-2001-10-16 (Econometric Time Series)
- NEP-MON-2001-10-16 (Monetary Economics)
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- al-Nowaihi, Ali & Stracca, Livio, 2002. "Non-standard central bank loss functions, skewed risks, and certainty equivalence," Working Paper Series 0129, European Central Bank.
- 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).
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