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Evaluating the Bank of England Density Forecasts of Ination,The Economic

By Michael Peter Clements and Michael P. Clements

Abstract

We consider evaluating the UK Monetary Policy Committee’s inflation density forecasts using probability integral transform goodness-of-fit tests. These tests evaluate the whole forecast density. We also consider whether the probabilities assigned to inflation being in certain ranges are well calibrated, where the ranges are chosen to be those of particular relevance to the MPC, given its remit of maintaining inflation rates in a band around 2 12 % per annum. Finally, we discuss the decision-based approach to forecast evaluation in relation to the MPC forecasts. Every quarter since August 1997 the Bank of England Inflation Report has pub-lished density forecasts of the annual rate of retail price inflation (excluding mortgage interest repayments, the RPIX measure) made by the Monetary Policy Committee. This marks an important departure from the traditional concern with the central tendency or most likely outcome of the future value of the variable, and is in line with the increasing recognition that an assessment of the degree of uncertainty surrounding a point forecast is generally indispensable. The particular form of the forecast densities emphasises possible asymmetries between upside and downside risks, presumably because these are foremost in the minds of th

Year: 2004
OAI identifier: oai:CiteSeerX.psu:10.1.1.907.4683
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