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

Kenneth Wallis ()

National Institute Economic Review, 1999, vol. 167, issue 1, 106-112

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.

Date: 1999
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