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The measurement and behavior of uncertainty: evidence from the ECB Survey of Professional Forecasters

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  • Robert W. Rich
  • Joseph Song
  • Joseph Tracy

Abstract

We use matched point and density forecasts of output growth and inflation from the ECB Survey of Professional Forecasters to derive measures of forecast uncertainty, forecast dispersion, and forecast accuracy. We construct uncertainty measures from aggregate density functions as well as from individual histograms. The uncertainty measures display countercyclical behavior, and there is evidence of increased uncertainty for output growth and inflation since 2007. The results also indicate that uncertainty displays a very weak relationship with forecast dispersion, corroborating the findings of other recent studies indicating that disagreement is not a valid proxy for uncertainty. In addition, we find no correspondence between movements in uncertainty and predictive accuracy, suggesting that time-varying conditional variance estimates may not provide a reliable proxy for uncertainty. Last, using a regression equation that can be interpreted as a (G)ARCH-M-type model, we find limited evidence of linkages between uncertainty and levels of inflation and output growth.

Suggested Citation

  • Robert W. Rich & Joseph Song & Joseph Tracy, 2012. "The measurement and behavior of uncertainty: evidence from the ECB Survey of Professional Forecasters," Staff Reports 588, Federal Reserve Bank of New York.
  • Handle: RePEc:fip:fednsr:588
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    References listed on IDEAS

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    Cited by:

    1. Oinonen, Sami & Paloviita, Maritta, 2014. "Analysis of aggregated inflation expectations based on the ECB SPF survey," Research Discussion Papers 29/2014, Bank of Finland.
    2. Katharina Glass & Ulrich Fritsche, 2015. "Real-time Macroeconomic Data and Uncertainty," Macroeconomics and Finance Series 201406, Hamburg University, Department Wirtschaft und Politik.
    3. Ambrocio, Gene, 2017. "The real effects of overconfidence and fundamental uncertainty shocks," Research Discussion Papers 37, Bank of Finland.
    4. Njindan Iyke, Bernard & Ho, Sin-Yu, 2018. "Inflation, Inflation Uncertainty, and Growth: Evidence from Ghana," MPRA Paper 85191, University Library of Munich, Germany.
    5. Hartmann, Matthias & Herwartz, Helmut & Ulm, Maren, 2017. "A comparative assessment of alternative ex ante measures of inflation uncertainty," International Journal of Forecasting, Elsevier, vol. 33(1), pages 76-89.
    6. Rich, Robert W. & Tracy, Joseph, 2017. "The behavior of uncertainty and disagreement and their roles in economic prediction: a panel analysis," Staff Reports 808, Federal Reserve Bank of New York.
    7. Tomasz Łyziak & Maritta Paloviita, 2017. "Formation of inflation expectations in turbulent times. Recent evidence from the European Survey of Professional Forecasters," NBP Working Papers 261, Narodowy Bank Polski, Economic Research Department.
    8. Amélie Charles & Olivier Darné & Laurent Ferrara, 2014. "Does the Great Recession imply the end of the Great Moderation? International evidence," EconomiX Working Papers 2014-21, University of Paris Nanterre, EconomiX.
    9. Ambrocio, Gene, 2017. "The real effects of overconfidence and fundamental uncertainty shocks," Research Discussion Papers 37/2017, Bank of Finland.
    10. Falck, Elisabeth & Hoffmann, Mathias & Hürtgen, Patrick, 2017. "Disagreement and monetary policy," Discussion Papers 29/2017, Deutsche Bundesbank.
    11. repec:spr:empeco:v:53:y:2017:i:1:d:10.1007_s00181-017-1228-3 is not listed on IDEAS
    12. repec:spr:empeco:v:53:y:2017:i:1:d:10.1007_s00181-017-1248-z is not listed on IDEAS
    13. Paloviita, Maritta & Virén, Matti, 2014. "Analysis of forecast errors in micro-level survey data," Research Discussion Papers 8/2014, Bank of Finland.
    14. repec:lrk:eeaart:36_1_16 is not listed on IDEAS
    15. repec:eee:intfor:v:34:y:2018:i:1:p:105-116 is not listed on IDEAS
    16. repec:spr:empeco:v:53:y:2017:i:1:d:10.1007_s00181-016-1181-6 is not listed on IDEAS
    17. Hur, Joonyoung & Kim, Insu, 2017. "Inattentive agents and disagreement about economic activity," Economic Modelling, Elsevier, vol. 63(C), pages 175-190.
    18. Łyziak, Tomasz & Paloviita, Maritta, 2017. "Formation of inflation expectations in turbulent times : Can ECB manage inflation expectations of professional forecasters?," Research Discussion Papers 13/2017, Bank of Finland.
    19. Andrade, P. & Ghysels, E. & Idier, J., 2012. "Tails of Inflation Forecasts and Tales of Monetary Policy," Working papers 407, Banque de France.
    20. Sami Oinonen & Maritta Paloviita, 2017. "How Informative are Aggregated Inflation Expectations? Evidence from the ECB Survey of Professional Forecasters," Journal of Business Cycle Research, Springer;Centre for International Research on Economic Tendency Surveys (CIRET), vol. 13(2), pages 139-163, November.
    21. Knüppel, Malte, 2018. "Forecast-error-based estimation of forecast uncertainty when the horizon is increased," International Journal of Forecasting, Elsevier, vol. 34(1), pages 105-116.
    22. O. Grishchenko & S. Mouabbi & J.-P. Renne, 2017. "The Joint Dynamics of U.S. and Euro-area Inflation Rates: Expectations and Time-varying Uncertainty," Working papers 622, Banque de France.

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    Keywords

    Uncertainty ; European Central Bank ; Economic forecasting ; Inflation (Finance);

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