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Uncertainty and disagreement in economic forecasting

  • Stefania D'Amico
  • Athanasios Orphanides

Using the probabilistic responses from the Survey of Professional Forecasters, we study the evolution of uncertainty and disagreement associated with inflation forecasts in the United States since 1968. We compare and contrast alternative measures summarizing the distributions of mean forecasts and forecast uncertainty across individuals at an approximate one-year-ahead horizon. In light of the heterogeneity in individual uncertainty reflected in the survey responses, we provide quarterly estimates for both average uncertainty and disagreement regarding uncertainty. We propose direct estimation of parametric distributions characterizing the uncertainty across individuals in a manner that mitigates errors associated with rounding and approximation of responses when individual uncertainty is small. Our results indicate that higher average expected inflation is associated with both higher average inflation uncertainty and greater disagreement about the inflation outlook. Disagreement about the mean forecast, however, may be a weak proxy for forecast uncertainty. We also examine the relationship of these measures with the term premia embedded in the term-structure of interest rates.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2008-56.

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Date of creation: 2008
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Handle: RePEc:fip:fedgfe:2008-56
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  1. Engelberg, Joseph & Manski, Charles F. & Williams, Jared, 2009. "Comparing the Point Predictions and Subjective Probability Distributions of Professional Forecasters," Journal of Business & Economic Statistics, American Statistical Association, vol. 27, pages 30-41.
  2. Robert Rich & Joseph Tracy, 2003. "Modeling uncertainty: predictive accuracy as a proxy for predictive confidence," Staff Reports 161, Federal Reserve Bank of New York.
  3. Findley, David F, et al, 1998. "New Capabilities and Methods of the X-12-ARIMA Seasonal-Adjustment Program," Journal of Business & Economic Statistics, American Statistical Association, vol. 16(2), pages 127-52, April.
  4. Kajal Lahiri & Fushang Liu, 2006. "Modeling Multi-Period Inflation Uncertainty Using a Panel of Density Forcasts," Discussion Papers 06-05, University at Albany, SUNY, Department of Economics.
  5. Giordani, Paolo & Soderlind, Paul, 2003. "Inflation forecast uncertainty," European Economic Review, Elsevier, vol. 47(6), pages 1037-1059, December.
  6. Zarnowitz, Victor & Lambros, Louis A, 1987. "Consensus and Uncertainty in Economic Prediction," Journal of Political Economy, University of Chicago Press, vol. 95(3), pages 591-621, June.
  7. Dean Croushore, 1993. "Introducing: the survey of professional forecasters," Business Review, Federal Reserve Bank of Philadelphia, issue Nov, pages 3-15.
  8. Robert Rich & Joseph Tracy, 2006. "The relationship between expected inflation, disagreement, and uncertainty: evidence from matched point and density forecasts," Staff Reports 253, Federal Reserve Bank of New York.
  9. Victor Zarnowitz & Louis A. Lambros, 1983. "Consensus and Uncertainty in Economic Prediction," NBER Working Papers 1171, National Bureau of Economic Research, Inc.
  10. Víctor Gómez & Agustín Maravall, 1998. "Automatic Modeling Methods for Univariate Series," Banco de Espa�a Working Papers 9808, Banco de Espa�a.
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