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Inflation fan charts and different dimensions of uncertainty. What if macroeconomic uncertainty is high?

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Abstract

The paper discusses problems associated with communicating uncertainty by means of ‘fan charts’, used in many central banks for presenting density forecasts of inflation and other macroeconomic variables. Limitations of fan charts in the case of high macroeconomic uncertainty are shown. Issues related to definition of uncertainty are addressed, stressing the need to distinguish between statistical model errors and uncertainty due to lack of knowledge. Modifications of the standard methods of constructing fan charts are suggested. The proposed approach is based on t wo d istributions, o ne of w hich is s ubjective and describes possible macroeconomic scenarios, while the other describes model errors. Total uncertainty is represented as a mixture distribution or density convolution. The proposed approach, although it is a mix of judgment and statistics, allows preserving information about scenarios and separating in the analysis different types of uncertainties.

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  • Halina Kowalczyk, 2013. "Inflation fan charts and different dimensions of uncertainty. What if macroeconomic uncertainty is high?," NBP Working Papers 157, Narodowy Bank Polski.
    • Handle: RePEc:nbp:nbpmis:157
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    Cited by:

    1. Wojciech Charemza & Carlos Diaz Vela & Svetlana Makarova, 2013. "Too many skew normal distributions? The practitioner’s perspective," Discussion Papers in Economics 13/07, Division of Economics, School of Business, University of Leicester.
    2. Svetlana Makarova, 2014. "Risk and Uncertainty: Macroeconomic Perspective," UCL SSEES Economics and Business working paper series 129, UCL School of Slavonic and East European Studies (SSEES).

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