Inflation fan charts, monetary policy and skew normal distribution
Issues related to classification, interpretation and estimation of inflationary uncertainties are addressed in the context of their application for constructing probability forecasts of inflation. It is shown that confusions in defining uncertainties lead to potential misunderstandings of such forecasts. The principal source of such confusion is in ignoring the effect of feedback from the policy action undertaken on the basis of forecasts of inflation onto uncertainties. In order to resolve this problem a new class of skew normal distributions (weighted skew normal, WSN) have been proposed and its properties derived. It is shown that parameters of WSN distribution can be interpreted in relation to the monetary policy strength and symmetry. It has been fitted to empirical distributions of inflation multi-step forecast errors of inflation for 34 countries, alongside others distributions already existing in the literature. The estimation method applied is using the minimum distance criteria between the empirical and theoretical distributions. Results lead to some constructive conclusions regarding the strength and asymmetry of monetary policy and confirm the applicability of WSN to producing probabilistic forecasts of inflation.
|Date of creation:||May 2013|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: +44 (0)116 252 2887
Fax: +44 (0)116 252 2908
Web page: http://www2.le.ac.uk/departments/economics
More information through EDIRC
|Order Information:|| Web: http://www2.le.ac.uk/departments/economics/research/discussion-papers Email: |
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Michael P. Clements, 2004. "Evaluating the Bank of England Density Forecasts of Inflation," Economic Journal, Royal Economic Society, vol. 114(498), pages 844-866, October.
- Kenneth F. Wallis, 2004. "An Assessment of Bank of England and National Institute Inflation Forecast Uncertainties," National Institute Economic Review, National Institute of Economic and Social Research, vol. 189(1), pages 64-71, July.
- Daal, Elton & Naka, Atsuyuki & Sanchez, Benito, 2005. "Re-examining inflation and inflation uncertainty in developed and emerging countries," Economics Letters, Elsevier, vol. 89(2), pages 180-186, November.
- Dominicy, Yves & Veredas, David, 2013. "The method of simulated quantiles," Journal of Econometrics, Elsevier, vol. 172(2), pages 235-247.
- Elder, John, 2004. "Another Perspective on the Effects of Inflation Uncertainty," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(5), pages 911-28, October.
- A. Kontonikas, 2002.
"Inflation and Inflation Uncertainty in the United Kingdom: Evidence from GARCH modelling,"
Public Policy Discussion Papers
02-28, Economics and Finance Section, School of Social Sciences, Brunel University.
- Kontonikas, A., 2004. "Inflation and inflation uncertainty in the United Kingdom, evidence from GARCH modelling," Economic Modelling, Elsevier, vol. 21(3), pages 525-543, May.
- A. Kontonikas, 2002. "Inflation and Inflation Uncertainty in the United Kingdom: Evidence from GARCH modelling," Economics and Finance Discussion Papers 02-28, Economics and Finance Section, School of Social Sciences, Brunel University.
- Stilianos Fountas & Menelaos Karanasos & Jinki Kim, 2006. "Inflation Uncertainty, Output Growth Uncertainty and Macroeconomic Performance," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 68(3), pages 319-343, 06.
- Bruce C. Greenwald & Joseph E. Stiglitz, 1990.
"Asymmetric Information and the New Theory of the Firm: Financial Constraints and Risk Behavior,"
NBER Working Papers
3359, National Bureau of Economic Research, Inc.
- Greenwald, Bruce C & Stiglitz, Joseph E, 1990. "Asymmetric Information and the New Theory of the Firm: Financial Constraints and Risk Behavior," American Economic Review, American Economic Association, vol. 80(2), pages 160-65, May.
- Arthur Pewsey, 2000. "Problems of inference for Azzalini's skewnormal distribution," Journal of Applied Statistics, Taylor & Francis Journals, vol. 27(7), pages 859-870.
- Neanidis, Kyriakos C. & Savva, Christos S., 2011.
"Nominal uncertainty and inflation: The role of European Union membership,"
Elsevier, vol. 112(1), pages 26-30, July.
- Kyriakos C. Neanidis & Christos S. Savva, 2010. "Nominal Uncertainty and Inflation: The Role of European Union Membership," Centre for Growth and Business Cycle Research Discussion Paper Series 146, Economics, The Univeristy of Manchester.
- M. Ruth & K. Donaghy & P. Kirshen, 2006. "Introduction," Chapters, in: Regional Climate Change and Variability, chapter 1 Edward Elgar.
- Giordani, Paolo & Soderlind, Paul, 2000.
"Inflation Forecast Uncertainty,"
SSE/EFI Working Paper Series in Economics and Finance
384, Stockholm School of Economics, revised 09 Oct 2000.
- Kemp, Gordon C.R., 1991. "The Joint Distribution of Forecast Errors in the AR(1) Model," Econometric Theory, Cambridge University Press, vol. 7(04), pages 497-518, December.
- Sandy Suardi & O.T.Henry & N. Olekalns, .
"Testing for Rate-Dependence and Asymmetry in Inflation Uncertainty: Evidence from the G7 Economies,"
MRG Discussion Paper Series
0306, School of Economics, University of Queensland, Australia.
- Henry, Olan T. & Olekalns, Nilss & Suardi, Sandy, 2007. "Testing for rate dependence and asymmetry in inflation uncertainty: Evidence from the G7 economies," Economics Letters, Elsevier, vol. 94(3), pages 383-388, March.
- Olan T. Henry & Nilss Olekalns & Sandy Suardi, 2006. "Testing for Rate-Dependence and Asymmetry in Inflation Uncertainty:Evidence from the G7 Economies," Department of Economics - Working Papers Series 959, The University of Melbourne.
- Bomberger, William A, 1996. "Disagreement as a Measure of Uncertainty," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(3), pages 381-92, August.
- Fushang Liu & Kajal Lahiri, 2006.
"Modelling multi-period inflation uncertainty using a panel of density forecasts,"
Journal of Applied Econometrics,
John Wiley & Sons, Ltd., vol. 21(8), pages 1199-1219.
- 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.
- Fountas, Stilianos, 2010.
"Inflation, inflation uncertainty and growth: Are they related?,"
Elsevier, vol. 27(5), pages 896-899, September.
- Stilianos Fountas, 2010. "Inflation, inflation uncertainty and growth: are they related ?," Discussion Paper Series 2010_12, Department of Economics, University of Macedonia, revised Dec 2010.
- Dowd, Kevin, 2007. "Too good to be true? The (In)credibility of the UK inflation fan charts," Journal of Macroeconomics, Elsevier, vol. 29(1), pages 91-102, March.
- Chiu, Jonathan & Molico, Miguel, 2010.
"Liquidity, redistribution, and the welfare cost of inflation,"
Journal of Monetary Economics,
Elsevier, vol. 57(4), pages 428-438, May.
- Jonathan Chiu & Miguel Molico, 2007. "Liquidity, Redistribution, and the Welfare Cost of Inflation," Working Papers 07-39, Bank of Canada.
- Cogley, Timothy & Morozov, Sergei & Sargent, Thomas J., 2005.
"Bayesian fan charts for U.K. inflation: Forecasting and sources of uncertainty in an evolving monetary system,"
Journal of Economic Dynamics and Control,
Elsevier, vol. 29(11), pages 1893-1925, November.
- Cogley, Timothy W. & Morozov, Sergei & Sargent, Thomas J., 2003. "Bayesian fan charts for UK inflation: Forecasting and sources of uncertainty in an evolving monetary system," CFS Working Paper Series 2003/44, Center for Financial Studies (CFS).
- Berument, Hakan & Yalcin, Yeliz & Yildirim, Julide, 2009. "The effect of inflation uncertainty on inflation: Stochastic volatility in mean model within a dynamic framework," Economic Modelling, Elsevier, vol. 26(6), pages 1201-1207, November.
- Taylor, A M Robert, 2003. "Robust Stationarity Tests in Seasonal Time Series Processes," Journal of Business & Economic Statistics, American Statistical Association, vol. 21(1), pages 156-63, January.
- repec:ulb:ulbeco:2013/136280 is not listed on IDEAS
- Kemp, Gordon C.R., 1999. "The Behavior Of Forecast Errors From A Nearly Integrated Ar(1) Model As Both Sample Size And Forecast Horizon Become Large," Econometric Theory, Cambridge University Press, vol. 15(02), pages 238-256, April.
- Luca Greco, 2011. "Minimum Hellinger distance based inference for scalar skew-normal and skew-t distributions," TEST: An Official Journal of the Spanish Society of Statistics and Operations Research, Springer, vol. 20(1), pages 120-137, May.
- Hartmann, Matthias & Herwartz, Helmut, 2012. "Causal relations between inflation and inflation uncertainty—Cross sectional evidence in favour of the Friedman–Ball hypothesis," Economics Letters, Elsevier, vol. 115(2), pages 144-147.
- Anthony Tay & Kenneth F. Wallis, 2000. "Density Forecasting: A Survey," Econometric Society World Congress 2000 Contributed Papers 0370, Econometric Society.
When requesting a correction, please mention this item's handle: RePEc:lec:leecon:13/06. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mrs. Alexandra Mazzuoccolo)
If references are entirely missing, you can add them using this form.