IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper

Inflation fan charts, monetary policy and skew normal distribution

  • Wojciech Charemza
  • Carlos Diaz Vela
  • Svetlana Makarova

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.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.le.ac.uk/economics/research/repec/lec/leecon/dp13-06.pdf
Download Restriction: no

Paper provided by Department of Economics, University of Leicester in its series Discussion Papers in Economics with number 13/06.

as
in new window

Length:
Date of creation: May 2013
Date of revision:
Handle: RePEc:lec:leecon:13/06
Contact details of provider: Postal:
Department of Economics University of Leicester, University Road. Leicester. LE1 7RH. UK

Phone: +44 (0)116 252 2887
Fax: +44 (0)116 252 2908
Web page: http://www2.le.ac.uk/departments/economics
Email:


More information through EDIRC

Order Information: Web: http://www2.le.ac.uk/departments/economics/research/discussion-papers Email:


References listed on IDEAS
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.:

as in new window
  1. 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.
  2. 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.
  3. Carsten Hefeker & Blandine Zimmer, 2010. "Central bank independence and conservatism under uncertainty: Substitutes or complements?," Volkswirtschaftliche Diskussionsbeiträge 140-10, Universität Siegen, Fakultät Wirtschaftswissenschaften, Wirtschaftsinformatik und Wirtschaftsrecht.
  4. Dominicy, Yves & Veredas, David, 2013. "The method of simulated quantiles," Journal of Econometrics, Elsevier, vol. 172(2), pages 235-247.
  5. 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.
  6. 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.
  7. Andrade, P. & Le Bihan, H., 2010. "Inattentive professional forecasters," Working papers 307, Banque de France.
  8. Giordani, Paolo & Soderlind, Paul, 2003. "Inflation forecast uncertainty," European Economic Review, Elsevier, vol. 47(6), pages 1037-1059, December.
  9. Anthony Garratt & Gary Koop & Emi Mise & Shaun P Vahey, 2007. "Real-time Prediction with UK Monetary Aggregates in the Presence of Model Uncertainty," Birkbeck Working Papers in Economics and Finance 0714, Birkbeck, Department of Economics, Mathematics & Statistics.
  10. Maximiano Pinheiro & Paulo Soares Esteves, 2008. "On the uncertainty and risks of macroeconomic forecasts: Combining judgements with sample and model information," Working Papers w200821, Banco de Portugal, Economics and Research Department.
  11. Christian Buelens, 2012. "Inflation forecasting and the crisis: assessing the impact on the performance of different forecasting models and methods," European Economy - Economic Papers 2008 - 2015 451, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
  12. 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.
  13. Frenkel, Michael & Rülke, Jan-Christoph & Zimmermann, Lilli, 2013. "Do private sector forecasters chase after IMF or OECD forecasts?," Journal of Macroeconomics, Elsevier, vol. 37(C), pages 217-229.
  14. Kai Hielscher & Gunther Markwardt, 2011. "The Role of Political Institutions for the Effectiveness of Central Bank Independence," CESifo Working Paper Series 3396, CESifo Group Munich.
  15. Anna Clara Monti, 2003. "A note on the estimation of the skew normal and the skew exponential power distributions," Metron - International Journal of Statistics, Dipartimento di Statistica, Probabilità e Statistiche Applicate - University of Rome, vol. 0(2), pages 205-219.
  16. 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).
  17. Hilde C. Bjørnland & Karsten Gerdrup & Anne Sofie Jore & Christie Smith & Leif Anders Thorsrud, 2012. "Does Forecast Combination Improve Norges Bank Inflation Forecasts?," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 74(2), pages 163-179, 04.
  18. Robert Rich & Joseph Tracy, 2010. "The Relationships among Expected Inflation, Disagreement, and Uncertainty: Evidence from Matched Point and Density Forecasts," The Review of Economics and Statistics, MIT Press, vol. 92(1), pages 200-207, February.
  19. McDonald, James B. & Xu, Yexiao J., 1995. "A generalization of the beta distribution with applications," Journal of Econometrics, Elsevier, vol. 66(1-2), pages 133-152.
  20. Groen, J.J.J. & Paap, R., 2009. "Real-time inflation forecasting in a changing world," Econometric Institute Research Papers EI 2009-19, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
  21. Perron, Pierre & Qu, Zhongjun, 2007. "A simple modification to improve the finite sample properties of Ng and Perron's unit root tests," Economics Letters, Elsevier, vol. 94(1), pages 12-19, January.
  22. James H. Stock & Mark W. Watson, 2007. "Why Has U.S. Inflation Become Harder to Forecast?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(s1), pages 3-33, 02.
  23. Eijffinger, S.C.W. & Geraats, P.M., 2004. "How Transparent Are Central Banks?," Cambridge Working Papers in Economics 0411, Faculty of Economics, University of Cambridge.
  24. Peng, Amy & Yang, Ling, 2008. "Modelling uncertainty: A recursive VAR bootstrapping approach," Economics Letters, Elsevier, vol. 99(3), pages 478-481, June.
  25. Matei Demetrescu & Mu-Chun Wang, 2014. "Incorporating Asymmetric Preferences into Fan Charts and Path Forecasts," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 76(2), pages 287-297, 04.
  26. repec:ulb:ulbeco:2013/136280 is not listed on IDEAS
  27. Michael Clements, 2006. "Evaluating the survey of professional forecasters probability distributions of expected inflation based on derived event probability forecasts," Empirical Economics, Springer, vol. 31(1), pages 49-64, March.
  28. 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.
  29. Todd E. Clark, 2011. "Real-Time Density Forecasts From Bayesian Vector Autoregressions With Stochastic Volatility," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 29(3), pages 327-341, July.
  30. 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.
  31. M. Ruth & K. Donaghy & P. Kirshen, 2006. "Introduction," Chapters, in: Regional Climate Change and Variability, chapter 1 Edward Elgar Publishing.
  32. Carlos Bowles & Roberta Friz & Veronique Genre & Geoff Kenny & Aidan Meyler & Tuomas Rautanen, 2007. "The ECB survey of professional forecasters (SPF) – A review after eight years’ experience," Occasional Paper Series 59, European Central Bank.
  33. 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.
  34. So, Eric C., 2013. "A new approach to predicting analyst forecast errors: Do investors overweight analyst forecasts?," Journal of Financial Economics, Elsevier, vol. 108(3), pages 615-640.
  35. 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.
  36. 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.
  37. 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.
  38. Fountas, Stilianos, 2010. "Inflation, inflation uncertainty and growth: Are they related?," Economic Modelling, Elsevier, vol. 27(5), pages 896-899, September.
  39. Arthur Pewsey, 2000. "Problems of inference for Azzalini's skewnormal distribution," Journal of Applied Statistics, Taylor & Francis Journals, vol. 27(7), pages 859-870.
  40. Siklos, Pierre L., 2013. "Sources of disagreement in inflation forecasts: An international empirical investigation," Journal of International Economics, Elsevier, vol. 90(1), pages 218-231.
  41. N. Nergiz Dincer & Barry Eichengreen, 2014. "Central Bank Transparency and Independence: Updates and New Measures," International Journal of Central Banking, International Journal of Central Banking, vol. 10(1), pages 189-259, March.
  42. 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.
  43. Joseph Engelberg & Charles F. Manski & Jared Williams, 2006. "Comparing the Point Predictions and Subjective Probability Distributions of Professional Forecasters," NBER Working Papers 11978, National Bureau of Economic Research, Inc.
  44. 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.
  45. 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.
  46. Francq, Christian & Zakoïan, Jean-Michel, 2012. "Qml Estimation Of A Class Of Multivariate Asymmetric Garch Models," Econometric Theory, Cambridge University Press, vol. 28(01), pages 179-206, February.
  47. 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.
  48. 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.
  49. Nicholas Bloom, 2009. "The Impact of Uncertainty Shocks," Econometrica, Econometric Society, vol. 77(3), pages 623-685, 05.
  50. Gary Koop & Dimitris Korobilis, 2009. "Forecasting Inflation Using Dynamic Model Averaging," Working Paper Series 34_09, The Rimini Centre for Economic Analysis.
  51. Costantini, Mauro & Kunst, Robert M., 2009. "Combining Forecasts Based on Multiple Encompassing Tests in a Macroeconomic Core System," Economics Series 243, Institute for Advanced Studies.
  52. Andrew J. Patton & Allan Timmermann, 2011. "Predictability of Output Growth and Inflation: A Multi-Horizon Survey Approach," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 29(3), pages 397-410, July.
  53. Kajal Lahiri & Xuguang Sheng, 2008. "Measuring Forecast Uncertainty by Disagreement: The Missing Link," Ifo Working Paper Series Ifo Working Paper No. 60, Ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
  54. Serena Ng & Pierre Perron, 1997. "Lag Length Selection and the Construction of Unit Root Tests with Good Size and Power," Boston College Working Papers in Economics 369, Boston College Department of Economics, revised 01 Sep 2000.
  55. Thomas F. Cargill, 2013. "A Critical Assessment Of Measures Of Central Bank Independence," Economic Inquiry, Western Economic Association International, vol. 51(1), pages 260-272, 01.
  56. 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.
  57. 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.
  58. Anthony Tay & Kenneth F. Wallis, 2000. "Density Forecasting: A Survey," Econometric Society World Congress 2000 Contributed Papers 0370, Econometric Society.
  59. Carrion-i-Silvestre, Josep Lluís & Kim, Dukpa & Perron, Pierre, 2009. "Gls-Based Unit Root Tests With Multiple Structural Breaks Under Both The Null And The Alternative Hypotheses," Econometric Theory, Cambridge University Press, vol. 25(06), pages 1754-1792, December.
  60. Patton, Andrew J. & Timmermann, Allan, 2010. "Why do forecasters disagree? Lessons from the term structure of cross-sectional dispersion," Journal of Monetary Economics, Elsevier, vol. 57(7), pages 803-820, October.
  61. 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;Sociedad de Estadística e Investigación Operativa, vol. 20(1), pages 120-137, May.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

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 you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.