In recent years there has been considerable interest in density forecasts. This has been fuelled by the rapidly expanding field of financial risk management, as well as by the literature on inflation forecasting.1 For example, if the goal is to achieve an inflation rate in a certain range or target band, a point forecast of inflation is of limited value. A histogram (or density forecast) that assigns probabilities to inflation falling in certain intervals will be more informative about the likelihood of the target being met. That said, the forecast histogram will only be of value to the extent that the forecast probabilities accurately capture the true probabilities. As in previous chapters, our focus will be on evaluation, where the forecasts are now densities, or histograms, or probability distributions.
KeywordsForecast Probability Forecast Evaluation Point Forecast Interval Forecast Monetary Policy Committee
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