The Relationship between Expected Inflation, Disagreement, and Uncertainty: Evidence from Matched Point and Density Forecasts (original) (raw)

CREATES Research Paper 2008-56 Disagreement and Biases in Inflation Expectations

2008

Disagreement in inflation expectations observed from survey data varies systematically over time in a way that reflects the level and variance of current inflation. This paper offers a simple explanation for these facts based on asymmetries in the forecasters’ costs of overand under-predicting inflation. Our model implies (i) biased forecasts; (ii) positive serial correlation in forecast errors; (iii) a cross-sectional dispersion that rises with the level and the variance of the inflation rate; and (iv) predictability of forecast errors at different horizons by means of the spread between the shortand long-term variance of inflation. We find empirically that these patterns are present in inflation forecasts from the Survey of Professional Forecasters. A constant bias component, not explained by asymmetric loss and rational expectations, is required to explain the shift in the sign of the bias observed for a substantial portion of forecasters around 1982.

Modelling multi-period inflation uncertainty using a panel of density forecasts

Journal of Applied Econometrics, 2006

This paper examines the determinants of inflation forecast uncertainty using a panel of density forecasts from the Survey of Professional Forecasters (SPF). Based on a dynamic heterogeneous panel data model, we find that the persistence in forecast uncertainty is much less than what the aggregate time series data would suggest. In addition, the strong link between past forecast errors and current forecast uncertainty, as often is noted in the ARCH literature, is largely lost in a multiperiod context with varying forecast horizons. We propose a novel way of estimating "news" and its variance using the Kullback-Leibler Information, and show that the latter is an important determinant of forecast uncertainty. Our evidence suggests a strong relationship of forecast uncertainty with level of inflation, but not with forecaster discord or with the volatility of a number of other macroeconomic indicators.

The camp view of inflation forecasts

2009

Analyzing sample moments of survey forecasts, we derive disagreement and uncertainty measures for the short-and medium term inflation outlook. The latter provide insights into the development of inflation forecast uncertainty in the context of a changing macroeconomic environment since the beginning of 2008. Motivated by the debate on the role of monetary aggregates and cyclical variables describing a Phillips-curve logic, we develop a macroeconomic indicator spread which is assumed to drive forecasters' judgments. Empirical evidence suggests procyclical dynamics between disagreement among forecasters, individual forecast uncertainty and the macro-spread. We call this approach the camp view of inflation forecasts and show that camps form up whenever the spread widens.

Measuring forecast uncertainty by disagreement: The missing link

Journal of Applied Econometrics, 2010

Using a standard decomposition of forecast errors into common and idiosyncratic shocks, we show that aggregate forecast uncertainty can be expressed as the disagreement among the forecasters plus the perceived variability of future aggregate shocks. Thus the reliability of disagreement as a proxy for uncertainty will be determined by the stability of the forecasting environment and the length of the forecast horizon. Using density forecasts from the Survey of Professional Forecasters, we find direct evidence in support of our hypothesis. Our results support the use of GARCH-type models, rather than the ex post squared errors in consensus forecasts, to estimate the ex ante variability of aggregate shocks as a component of aggregate uncertainty. , which excluded two bordering recessions) with 16 available forecasters. The average values of the covariances were 0.04 and 0.06, respectively, during these two fairly diverse periods.

Is Disagreement a Good Proxy for Inflation

2012

This study uses inflation expectation errors to measure inflation uncertainty in Turkey by analyzing the CBRT Survey of Expectations data and investigates whether the disagreement among the survey participants can be used as a proxy for inflation uncertainty. Results reveal the importance of the inflation targeting regime. In particular, disagreement seems to be a good proxy for inflation uncertainty for the 2001-2006 period while this relationship vanishes with the full-fledged inflation targeting regime after 2006. JEL C22, C82, E31

Uncertainty and Disagreement in Economic Prediction: The Bank of England Survey of External Forecasters

The Economic Journal, 2008

This article introduces a new source of survey data, namely the Bank of England Survey of External Forecasters. The survey collects point and density forecasts of inflation and GDP growth, and hence offers the opportunity of constructing direct measures of uncertainty. We present a simple statistical framework in which to define and interrelate measures of uncertainty and disagreement. The resulting measures are compared with other direct measures of uncertainty, nationally and internationally. A significant, sustained reduction in inflation uncertainty followed the 1997 granting of operational independence to the Bank of England to pursue a monetary policy of inflation targeting.

Differential Interpretation of Information in Inflation Forecasts

Review of Economics and Statistics, 1999

We test the hypothesis associated with a standard assumption in the theoretical literature on learning: that economic agents interpret information identically. We use a data set based on a survey of Israeli business executives forecasting future inflation. One of the main advantages of using this data is that a major change in the inflation regime in 1985 can be treated as a natural experiment in new beliefs formation. We develop a methodology for testing this hypothesis and find evidence that is inconsistent with the identical-interpretation hypothesis, but is consistent with the proposed alternative.

The distribution of inflation forecast errors

Journal of Policy Modeling, 2015

This paper investigates the cross-sectional distribution of inflation forecasts errors over the period 1984-2007. Our working hypothesis is that the Fed's movement toward greater transparency starting in the mid-1990s likely affected both the distribution of forecast errors and the location of the Fed's staff forecasts within that distribution. This paper builds on earlier work which compared Fed forecasts to the mean or median of private sector forecasts by examining the entire distribution of forecasts. By examining the entire distribution we are able to compare the forecasting record of particular forecasters against a record comprised of randomly assigned forecasts from the Survey of Professional Forecasters. Since the Fed's move toward greater transparency beginning in 1994, its forecasting record is no longer significantly better than the forecasting record comprised of randomly assigned forecasts.

The role of media for inflation forecast disagreement of households and professional forecasters

This paper investigates the effects of media coverage about consumer price inflation on inflation forecast disagreement of German households and professional forecasters. We adopt a Bayesian learning model in which media coverage of inflation affects forecast disagreement by influencing information sets as well as predictor choice. Our empirical results show that disagreement of households depends on the heterogeneity of story content and on the reporting intensity, especially of news on rising inflation. Disagreement of professional forecasters does not depend on media coverage. With respect to the influence of macroeconomic variables, we provide evidence that disagreement of professional forecasters primarily depends on the inflation rate and on inflation volatility. The response of households to inflation is much less pronounced.