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Policy Makers Priors and Inflation Density Forecasts

Author

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  • Marco Vega

    (LSE & Central Bank of Peru)

Abstract

This paper models an inflation forecast density framework that closely resembles actual policy makers behaviour regarding the determination of the modal point, the uncertainty and asymmetry in the inflation forecasts. The framework combines policy makers prior information about these parameters with a standard parametric density estimation technique using Bayesian theory. The combination crucially hinges on an information-theoretic utility function gains of the policy maker from performing the forecast exercise.

Suggested Citation

  • Marco Vega, 2004. "Policy Makers Priors and Inflation Density Forecasts," Econometrics 0403005, EconWPA.
  • Handle: RePEc:wpa:wuwpem:0403005
    Note: Type of Document - pdf; pages: 32
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    File URL: http://econwpa.repec.org/eps/em/papers/0403/0403005.pdf
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    References listed on IDEAS

    as
    1. Neil R. Ericsson, 2001. "Forecast uncertainty in economic modeling," International Finance Discussion Papers 697, Board of Governors of the Federal Reserve System (U.S.).
    2. Svensson, Lars E. O., 1997. "Inflation forecast targeting: Implementing and monitoring inflation targets," European Economic Review, Elsevier, vol. 41(6), pages 1111-1146, June.
    3. Kilian, Lutz & Manganelli, Simone, 2003. "The Central Banker as a Risk Manager: Quantifying and Forecasting Inflation Risks," CEPR Discussion Papers 3918, C.E.P.R. Discussion Papers.
    4. Christopher A. Sims, 2002. "The Role of Models and Probabilities in the Monetary Policy Process," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 33(2), pages 1-62.
    5. Svensson, Lars E. O., 1999. "Inflation targeting as a monetary policy rule," Journal of Monetary Economics, Elsevier, vol. 43(3), pages 607-654, June.
    6. C. A. E. Goodhart, 2001. "The Inflation Forecast," National Institute Economic Review, National Institute of Economic and Social Research, vol. 175(1), pages 59-66, January.
    7. 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.
    8. John Geweke, 1999. "Using simulation methods for bayesian econometric models: inference, development,and communication," Econometric Reviews, Taylor & Francis Journals, vol. 18(1), pages 1-73.
    9. repec:sae:niesru:v:167:y::i:1:p:106-112 is not listed on IDEAS
    10. Anthony Tay & Kenneth F. Wallis, 2000. "Density Forecasting: A Survey," Econometric Society World Congress 2000 Contributed Papers 0370, Econometric Society.
    11. Charles A.E. Goodhart, 2001. "Monetary transmission lags and the formulation of the policy decision on interest rates," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 165-186.
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    Cited by:

    1. Juan Manuel Julio, 2005. "Implementación, Uso e Interpretación del "Fan Chart"," Borradores de Economia 346, Banco de la Republica de Colombia.
    2. Dong Jin Lee, 2009. "Testing Parameter Stability in Quantile Models: An Application to the U.S. Inflation Process," Working papers 2009-26, University of Connecticut, Department of Economics.
    3. Mihaela Bratu, 2011. "The Assessement Of Uncertainty In Predictions Determined By The Variables Aggregation," Annales Universitatis Apulensis Series Oeconomica, Faculty of Sciences, "1 Decembrie 1918" University, Alba Iulia, vol. 2(13), pages 1-31.
    4. Amparo Maset-Llaudes & Ana Mª Fuertes-Eugenio & Pilar Pardo-Forcadell, 2011. "Integrated Urban Regeneration: An Empirical Study Of The Normative Framework In Spanish Regions," ERSA conference papers ersa11p1781, European Regional Science Association.

    More about this item

    Keywords

    Monetary Policy; Inflation Targeting; Bayesian Methods;

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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