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

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 noted in the ARCH literature, is largely lost in a multi-period 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. Copyright © 2006 John Wiley & Sons, Ltd.

[1]  H. Berument,et al.  Inflation and inflation uncertainty in the G-7 countries , 2005 .

[2]  K. Lahiri,et al.  ARCH models for multi-period forecast uncertainty-a reality check using a panel of density forecasts , 2005 .

[3]  M. Pesaran.  General diagnostic tests for cross-sectional dependence in panels , 2004, Empirical Economics.

[4]  M. Pesaran,et al.  Random Coefficient Panel Data Models , 2004, SSRN Electronic Journal.

[5]  A. Cukierman,et al.  Inflation, Inflation Uncertainty and a Common European Monetary Policy , 2004 .

[6]  Nicholas S. Souleles.  Expectations, Heterogeneous Forecast Errors, and Consumption: Micro Evidence from the Michigan Consumer Sentiment Surveys , 2004 .

[7]  David C. Ribar,et al.  Analysis of panel data, 2nd edition , 2004 .

[8]  Christopher D. Carroll,et al.  Macroeconomic Expectations of Households and Professional Forecasters , 2003 .

[9]  Joseph S. Tracy,et al.  Modeling Uncertainty: Predictive Accuracy as a Proxy for Predictive Confidence , 2003 .

[10]  J. Wolfers,et al.  Disagreement about Inflation Expectations , 2003, NBER Macroeconomics Annual.

[11]  C. Carroll.  RATS code for Macroeconomic Expectations Of Households And Professional Forecasters , 2003 .

[12]  Cheng Hsiao,et al.  Aggregate Vs Disaggregate Data Analysis | a Paradox in the Estimation of Money Demand Function of Japan under the Low I N Terest Rate Policy , 2002 .

[13]  K. Abadir,et al.  Aggregation, Persistence and Volatility in a Macro Model , 2002 .

[14]  R. Engle.  New Frontiers for Arch Models , 2002 .

[15]  J. Stock,et al.  Macroeconomic Forecasting Using Diffusion Indexes , 2002 .

[16]  Paolo Giordani,et al.  Inflation Forecast Uncertainty , 2001 .

[17]  Kenneth F. Wallis,et al.  Chi-Squared Tests of Interval and Density Forecasts, and the Bank of England's Fan Charts , 2001, SSRN Electronic Journal.

[18]  N. Mankiw,et al.  Sticky Information Versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve , 2001 .

[19]  J. Stock,et al.  Forecasting Output and Inflation: The Role of Asset Prices , 2001 .

[20]  Neil R. Ericsson.  Forecast Uncertainty in Economic Modeling , 2001 .

[21]  J. Bai,et al.  Determining the Number of Factors in Approximate Factor Models , 2000 .

[22]  M. Hashem Pesaran,et al.  Cross-sectional aggregation of non-linear models , 2000 .

[23]  Dean Croushore,et al.  A real-time data set for macroeconomists , 2001 .

[24]  Chang‐Jin Kim,et al.  State-Space Models with Regime-Switching: Classical and Gibbs Sampling Approaches with Applications , 1999 .

[25]  John Geweke,et al.  Using Simulation Methods for Bayesian Econometric Models , 1999 .

[26]  Cheng Hsiao,et al.  Analysis of Panels and Limited Dependent Variable Models , 1999 .

[27]  K. Grier,et al.  On inflation and inflation uncertainty in the G7 countries , 1998 .

[28]  Cheng Hsiao,et al.  Bayes Estimation of Short-run Coefficients in Dynamic Panel Data Models , 1998 .

[29]  John Geweke,et al.  Federal Reserve Bank of Minneapolis Research Department Staff Report 249 Using Simulation Methods for Bayesian Econometric Models: Inference, Development, and Communication , 2022 .

[30]  Anthony S. Tay,et al.  Evaluating Density Forecasts of Inflation: The Survey of Professional Forecasters , 1997 .

[31]  William A. Bomberger.  Disagreement as a Measure of Uncertainty , 1996 .

[32]  R. Batchelor,et al.  Empirical measures of inflation uncertainty: a cautionary note , 1996 .

[33]  Richard T. Baillie,et al.  Analysing inflation by the fractionally integrated ARFIMA–GARCH model , 1996 .

[34]  Ronald Smith,et al.  Dynamic Linear Models for Heterogenous Panels , 1996 .

[35]  M. Pesaran,et al.  Estimating Long-Run Relationships From Dynamic Heterogeneous Panels , 1995 .

[36]  Anthony Davies,et al.  A new framework for analyzing survey forecasts using three-dimensional panel data☆ , 1995 .

[37]  Arthur Lewbel,et al.  Aggregation and Simple Dynamics , 1994 .

[38]  Martin D.D. Evans,et al.  Inflation regimes and the sources of inflation uncertainty , 1993 .

[39]  Arthur Lewbel,et al.  Aggregation with Log-Linear Models , 1992 .

[40]  J. S. Butler,et al.  The Relationship between Forecast Dispersion and Forecast Uncertainty: Evidence from a Survey Data-ARCH Model , 1992 .

[41]  Victor Zarnowitz,et al.  Twenty-Two Years of the Nber-Asa Quarterly Economic Outlook Surveys: Aspects and Comparisons of Forecasting Performance , 1992 .

[42]  Martin D.D. Evans,et al.  Discovering the Link between Inflation Rates and Inflation Uncertainty , 1991 .

[43]  Daniel B. Nelson.  CONDITIONAL HETEROSKEDASTICITY IN ASSET RETURNS: A NEW APPROACH , 1991 .

[44]  Gregory D. Hess,et al.  Are Higher Levels of Inflation Less Predictable? A State-Dependent Conditional Heteroscedasticity Approach , 1993 .

[45]  L. Ball.  Why Does High Inflation Raise Inflation Uncertainty? , 1990 .

[46]  Stephen G. Cecchetti,et al.  Inflation and Uncertainty at Short and Long Horizons , 1990 .

[47]  Stephen G. Cecchetti,et al.  Inflation and Uncertainty at Long and Short Horizons , 1990 .

[48]  G. Schwert.  Why Does Stock Market Volatility Change Over Time? , 1988 .

[49]  G. Schwert.  Why Does Stock Market Volatility Change Over Time , 1988 .

[50]  K. Lahiri,et al.  Interest Rates and the Subjective Probability Distribution of Inflation Forecasts , 1988 .

[51]  Kajal Lahiri,et al.  On the normality of probability distributions of inflation and GNP forecasts , 1987 .

[52]  C. Hsiao.  Analysis of Panel Data , 1989 .

[53]  T. Bollerslev,et al.  Generalized autoregressive conditional heteroskedasticity , 1986 .

[54]  Adrian Pagan,et al.  Assessing the variability of inflation , 1983 .

[55]  Gary Chamberlain,et al.  FUNDS, FACTORS, AND DIVERSIFICATION IN ARBITRAGE PRICING MODELS , 1983 .

[56]  Robert F. Engle,et al.  Estimates of the Variance of U. S. Inflation Based upon the ARCH Model , 1983 .

[57]  M. Rothschild,et al.  Arbitrage, Factor Structure, and Mean-Variance Analysis on Large Asset Markets , 1982 .

[58]  R. Engle.  Autoregressive conditional heteroscedasticity with estimates of the variance of United Kingdom inflation , 1982 .

[59]  Adrian Pagan,et al.  The Lagrange Multiplier Test and its Applications to Model Specification in Econometrics , 1980 .

[60]  M. Friedman.  Nobel Lecture: Inflation and Unemployment , 1977, Journal of Political Economy.

[61]  Marc Nerlove,et al.  Pooling Cross-section and Time-series Data in the Estimation of a Dynamic Model , 1966 .

[62]  Jstor,et al.  Invention in the Industrial Research Laboratory , 1963, Journal of Political Economy.