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Conditional Term Structure of Inflation Forecast Uncertainty: The Copula Approach

Author

Listed:
  • Wojciech CHAREMZA

    (Vistula University, Poland.)

  • Carlos DÍAZ

    (University of Leicester, UK)

  • Svetlana MAKAROVA

    (University College London, UK.)

Abstract

The paper introduces the concept of conditional inflation forecast uncertainty. It is proposed that the joint and conditional distributions of the bivariate forecast uncertainty can be derived from the estimation of the unconditional distributions of these uncertainties and applying appropriate copula function. Empirical results have been obtained for Canada and the US. Term structure has been evaluated in the form of unconditional and conditional probabilities of hitting the inflation range of ±1% around the Canadian inflation target. The paper suggests a new measure of inflation forecast uncertainty that accounts for possible inter-country dependence. It is shown that the evaluation of targeting precision can be effectively improved with the use of ex-ante formulated conditional and unconditional probabilities of inflation being within the pre-defined band around the target.

Suggested Citation

  • Wojciech CHAREMZA & Carlos DÍAZ & Svetlana MAKAROVA, 2019. "Conditional Term Structure of Inflation Forecast Uncertainty: The Copula Approach," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(1), pages 5-18, March.
    • Handle: RePEc:rjr:romjef:v::y:2019:i:1:p:5-18
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    Cited by:

    1. Wensheng Kang & Ronald A. Ratti & Joaquin Vespignani, 2020. "Impact of global uncertainty on the global economy and large developed and developing economies," Applied Economics, Taylor & Francis Journals, vol. 52(22), pages 2392-2407, May.
    2. Kang, Wensheng & Ratti, Ronald. A. & Vespignani, Joaquin, 2016. "Global uncertainty and the global economy: Decomposing the impact of uncertainty shocks," Working Papers 2016-01, University of Tasmania, Tasmanian School of Business and Economics.
    3. Carlos A. Medel, 2018. "Forecasting Inflation with the Hybrid New Keynesian Phillips Curve: A Compact-Scale Global VAR Approach," International Economic Journal, Taylor & Francis Journals, vol. 32(3), pages 331-371, July.

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    More about this item

    Keywords

    macroeconomic forecasting; inflation; uncertainty; non-normality; density forecasting; forecast term structure; copula modelling;
    All these keywords.

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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