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Assessing gross domestic product and inflation probability forecasts derived from Bank of England fan charts

Authors


John W. Galbraith, Department of Economics, McGill University, 855 Sherbrooke Street, Montreal, Quebec, H4A 2K9, Canada. E-mail: john.galbraith@mcgill.ca

Abstract

Summary.  Density forecasts, including the pioneering Bank of England ‘fan charts’, are often used to produce forecast probabilities of a particular event. We use the Bank of England's forecast densities to calculate the forecast probability that annual rates of inflation and output growth exceed given thresholds. We subject these implicit probability forecasts to graphical and numerical diagnostic checks. We measure both their calibration and their resolution, providing both statistical and graphical interpretations of the results. The results reinforce earlier evidence on limitations of these forecasts and provide new evidence on their information content and on the relative performance of inflation and gross domestic product growth forecasts. In particular, gross domestic product forecasts show little or no ability to predict periods of low growth beyond the current quarter, in part because of the important role of data revisions.

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