The perils of approximating fixed-horizon inflation forecasts with fixed-event forecasts

James Yetman

No 700, BIS Working Papers from Bank for International Settlements

Abstract: A common practice in studies using inflation forecasts is to approximate fixed-horizon forecasts with fixed-event ones. Here we show that this may be problematic. In a panel of US inflation forecast data that allows us to compare the two, the approximation results in a mean absolute approximation error of around 0.2-0.3 percentage points (around 10% of the level of inflation), and statistically significant differences in both the variances and persistence of the approximate inflation forecasts relative to the actual forecasts. To reduce these problems, we propose an adjustment to the approximation, consistent with a model where longer-horizon forecasts are more heavily "anchored", while shorter-horizon forecasts more closely reflect current inflation levels.

Keywords: fixed-event forecasts; fixed-horizon forecasts; inflation expectations (search for similar items in EconPapers)
JEL-codes: C43 E31 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2018-02
New Economics Papers: this item is included in nep-cba, nep-for, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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