Abstract
This paper provides a systematic evaluation of the forecasting performance of the Bank of England’s RPIX inflation fan charts. The tests are carried out on forecast data that have gone through probability integral and then Berkowitz transformations to become standard normal under the null hypothesis that the Bank’s forecasts are adequate. These transformations are carried out for each of 9 forecast horizons. Except for the transformed series over the first (i.e., current-period) forecast horizon, these series are not predicted to be independent. The key problem in testing is then how to deal with this dependence structure, and three alternative approaches are suggested to deal with this problem: ignoring the dependence structure, positing an AR(1) dependence structure and positing an MA(k+1) dependence structure. Results indicate that there are serious problems with the fan chart forecasts whichever approach we take to the dependence structure, and the results for the longer horizon forecasts are especially poor. There can therefore be little doubt that the fan chart forecasts perform badly, especially over longer forecast horizons.
Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
