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What can probability forecasts tell us about inflation risks?

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  • Garcí­a, Juan Angel
  • Manzanares, Andrés

Abstract

A crucial but often ignored element of inflation expectations is the amount of perceived inflation risk. This paper estimates the degree of uncertainty and asymmetry in the probability forecasts of the Survey of Professional Forecasters (SPF) using a new methodology. The main conclusion from our analysis is that, when monitoring inflation expectations, limiting attention to a point prediction is not sufficient. The analysis of inflation expectations should take into account inflation risks. As an example, we show that our measures of inflation risks can better explain why inflation scares happened in the bond market during the Volcker disinflation. JEL Classification: C16, C42, E31, E47

Suggested Citation

  • Garcí­a, Juan Angel & Manzanares, Andrés, 2007. "What can probability forecasts tell us about inflation risks?," Working Paper Series 825, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:2007825
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    Cited by:

    1. Malte Knüppel & Guido Schultefrankenfeld, 2012. "How Informative Are Central Bank Assessments of Macroeconomic Risks?," International Journal of Central Banking, International Journal of Central Banking, vol. 8(3), pages 87-139, September.
    2. Andrade, Philippe & Fourel, Valère & Ghysels, Eric & Idier, Julien, 2014. "The financial content of inflation risks in the euro area," International Journal of Forecasting, Elsevier, vol. 30(3), pages 648-659.
    3. Andrade, P. & Ghysels, E. & Idier, J., 2012. "Tails of Inflation Forecasts and Tales of Monetary Policy," Working papers 407, Banque de France.
    4. Paul Söderlind, 2011. "Inflation Risk Premia and Survey Evidence on Macroeconomic Uncertainty," International Journal of Central Banking, International Journal of Central Banking, vol. 7(2), pages 113-133, June.
    5. Victor Lopez-Perez, 2016. "Macroeconomic Forecast Uncertainty In The Euro Area," Equilibrium. Quarterly Journal of Economics and Economic Policy, Institute of Economic Research, pages 9-41.
    6. Koop, Gary & Onorante, Luca, 2011. "Estimating Phillips Curves in Turbulent Times using the ECB’s Survey of Professional Forecasters," SIRE Discussion Papers 2011-19, Scottish Institute for Research in Economics (SIRE).
    7. repec:eee:jebusi:v:93:y:2017:i:c:p:46-61 is not listed on IDEAS
    8. Park, Yung Chul & Wyplosz, Charles, 2010. "Monetary and Financial Integration in East Asia: The Relevance of European Experience," OUP Catalogue, Oxford University Press, number 9780199587124.
    9. Lombardo, Giovanni & McAdam, Peter, 2012. "Financial market frictions in a model of the Euro area," Economic Modelling, Elsevier, pages 2460-2485.
    10. Gary Koop & Luca Onorante, 2011. "Estimating Phillips Curves in Turbulent Times using the ECBs Survey of Professional Forecasters," Working Papers 1109, University of Strathclyde Business School, Department of Economics.

    More about this item

    Keywords

    inflation expectations; inflation risk; power divergence estimators; skew-normal distribution; Survey of Professional Forecasters (SPF);

    JEL classification:

    • C16 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Econometric and Statistical Methods; Specific Distributions
    • C42 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Survey Methods
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications

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