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Uncertainty And Risk Analysis Of Macroeconomic Forecasts: Fan Charts Revisited

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  • Álvaro A. Novo
  • Maximiano Pinheiro

Abstract

Since 1996 the Bank of England (BoE) has been publishing estimates of probability distribution of the future outcomes of inflation and output growth. These density forecasts, known as "fan charts", became very popular with other central banks (e.g. Riskbank) as a tool to quantify uncertainties and risks of conditional point forecasts. The BoE's procedure is mainly a methodology to determine the distribution of a linear combination of independent random variables. In this article we propose an alternative methodology that addresses two issues with the BoE procedure that may affect the estimation of the densities. The first issue relates to a statistical shortcut taken by the BoE that implicitly considers that the mode of the linear combination of random variables is the (same) linear combination of the modes of those variables. The second issue deals with the assumption of independence, which may be restrictive. An illustration of the new methodology is presented and its results compared with the BoE approach.

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Bibliographic Info

Paper provided by Banco de Portugal, Economics and Research Department in its series Working Papers with number w200319.

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Date of creation: 2003
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Handle: RePEc:ptu:wpaper:w200319

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Cited by:
  1. Schultefrankenfeld, Guido, 2010. "Forecast uncertainty and the Bank of England interest rate decisions," Discussion Paper Series 1: Economic Studies 2010,27, Deutsche Bundesbank, Research Centre.
  2. Maximiano Pinheiro & Paulo Soares Esteves, 2008. "On the uncertainty and risks of macroeconomic forecasts: Combining judgements with sample and model information," Working Papers w200821, Banco de Portugal, Economics and Research Department.
  3. Paloviita , Maritta & Mayes , David, 2004. "The use of real time information in Phillips curve relationships for the euro area," Research Discussion Papers 16/2004, Bank of Finland.

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