Abstract
This paper studies uncertainty using the ECB Survey of Professional Forecasters’ data. Both inflation and real GDP growth forecasts at the micro level are considered. Our analysis indicates that individual inflation uncertainty is closely related to output growth uncertainty. Individual forecasters seem to behave according to an uncertainty-augmented hybrid specification of the New Keynesian Phillips curve. We also find evidence that inflation uncertainty has a negative impact on economic activity by lowering output growth, boosting inflation and reducing the price-sensitiveness of aggregate supply.
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Notes
The ECB SPF survey is described in detail in Bowles et al (2007).
Kenny et al. (2012) provide some evidence of the usefulness of these data by showing that distributional information helps to predict future inflation and output developments.
In our data, we found the expected values to be very close to the point forecasts. Thus, we do not do separate analyses for these two series.
This finding is consistent with Döpke and Fritsche (2006), who analyzed forecast dispersion of German professional forecasts for 1970–2004. They find that forecast dispersion varies over time and is particularly high before and during recessions.
Typically, long-term forecast uncertainty is interpreted using the standard deviation measure. Unfortunately, the sample size with long-term forecasts is so small that it is difficult to do a proper statistical analysis.
We in fact computed the number of respondents that attached a nonzero probability to more than four inflation values (ranges). The average value for the whole data sample was 20, but the minimum was nine.
Scrutiny of the distribution of individual distributions suggests, however, that the new questionnaires did not awfully much affect the reported distributions in the sense that many forecasters would have wanted to produce more gloomy forecasts prior to 2007 but would have been prevented in doing so because of missing values on the scale.
From the point of view of the Lucas (1973) supply curve, increased aggregate inflation uncertainty directly affects the supply curve coefficient and thus the price-sensitiveness of supply.
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Acknowledgments
Antti Komonen, Sami Oinonen and Tarja Yrjölä have kindly derived the data. Useful comments from two anonymous referees are also acknowledged.
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Paloviita, M., Viren, M. Inflation and output growth uncertainty in individual survey expectations. Empirica 41, 69–81 (2014). https://doi.org/10.1007/s10663-013-9225-z
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DOI: https://doi.org/10.1007/s10663-013-9225-z