The relationship between expected inflation, disagreement, and uncertainty: evidence from matched point and density forecasts

Robert Rich and Joseph Tracy

No 253, Staff Reports from Federal Reserve Bank of New York

Abstract: This paper examines matched point and density forecasts of inflation from the Survey of Professional Forecasters to analyze the relationship between expected inflation, disagreement, and uncertainty. We extend previous studies through our data construction and estimation methodology. Specifically, we derive measures of disagreement and uncertainty by using a decomposition proposed in earlier research by Wallis and by applying the concept of entropy from information theory. We also undertake the empirical analysis within a seemingly unrelated regression framework. Our results offer mixed support for the propositions that disagreement is a useful proxy for uncertainty and that increases in expected inflation are accompanied by heightened inflation uncertainty. However, we document a robust, quantitatively and statistically significant positive association between disagreement and expected inflation.

Keywords: point forecasts; density forecasts; inflation predictions; seemingly related regression; Survey of Professional Forecasters (SPF) (search for similar items in EconPapers)
JEL-codes: C12 C22 E37 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2006-07-01
New Economics Papers: this item is included in nep-cba, nep-ets, nep-for and nep-mon
Note: For a published version of this report, see Robert Rich and Joseph Tracy, "The Relationships among Expected Inflation, Disagreement, and Uncertainty: Evidence from Matched Point and Density Forecasts," Review of Economics and Statistics 92, no. 1 (February 2010): 200-7.
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Citations: View citations in EconPapers (17)

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