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Too Good to be True? The (In)credibility of the UK Inflation Fan Charts

This paper presents some simple methods to estimate the probability that realized inflation will breach a given inflation target range over a specified period, based on the Bank of England?s RPIX inflation forecasting model and the Monetary Policy Committee?s forecasts of the parameters on which this model is built. Illustrative results for plausible target ranges over the period up to 04Q1 indicate that these probabilities are low, if not very low, and strongly suggest that the Bank?s model over-estimates inflation risk.

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File URL: http://www.nottingham.ac.uk/%7Elizecon/RePEc/pdf/11.pdf
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Paper provided by Industrial Economics Division in its series Occasional Papers with number 11.

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Date of creation: 09 2004
Date of revision: 11 Jan 2004
Handle: RePEc:nub:occpap:11
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  1. John C. Williams, 1999. "Simple rules for monetary policy," Finance and Economics Discussion Series 1999-12, Board of Governors of the Federal Reserve System (U.S.).
  2. 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.
  3. Nessen, Marianne & Vestin, David, 2005. "Average Inflation Targeting," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(5), pages 837-63, October.
  4. Wallis, Kenneth F., 2003. "Chi-squared tests of interval and density forecasts, and the Bank of England's fan charts," International Journal of Forecasting, Elsevier, vol. 19(2), pages 165-175.
  5. Robert Dittmar & William T. Gavin & Finn Kydland, 1999. "The inflation-output variability tradeoff and price-level targets," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 23-32.
  6. David Reifschneider & John C. Williams, 2000. "Three lessons for monetary policy in a low-inflation era," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, pages 936-978.
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