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Asymmetric density forecasts of inflation and the Bank of England's fan chart

Published online by Cambridge University Press:  26 March 2020

Kenneth F. Wallis
Kenneth F. Wallis*
Affiliation:
Department of Economics, University of Warwick, CoventryCV4 7AL
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Abstract

This article examines the statistical issues surrounding the Bank of England's density forecast of inflation and its presentation as a ‘fan chart’. The Bank's preferred central projection is the mode of the density but this underestimates ‘average inflation over a number of years’ in terms of which monetary stability is defined. An alternative fan chart based on central prediction intervals is presented, better reflecting the extent to which the overall balance of risks is on the upside of the inflation target. An ‘all-or-nothing’ loss function is seen to be implicit in the Bank's choices of statistical measures, but is unrealistic.

Type
Articles
Information
National Institute Economic Review , Volume 167 , January 1999 , pp. 106 - 112
Copyright
Copyright © 1999 National Institute of Economic and Social Research

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Footnotes

∗

I am grateful to the Bank of England for permission to reproduce a fan chart, for supplying information on which it is based and for drawing, without prejudice, my alternative fan chart. All opinions expressed are entirely my own. This research is supported by a grant from the Economic and Social Research Council. A previous version of this article was circulated as ESRC Macroeconomic Modelling Bureau Discussion Paper no. 51 (July 1998).

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