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Evaluating the Bank of England Density Forecasts of Inflation* 

Authors


  • * 

    Financial support from the UK Economic and Social Research Council under grant L138251009 is gratefully acknowledged. Helpful comments were received from Jurgen Doornik, David Hendry and Ken Wallis. Detailed comments from three anonymous referees of this Journal are also gratefully acknowledged. Computations were performed using code written in the Gauss Programming Language, and Givewin 2 (Doornik and Hendry, 2001) was used to produce the graphs.

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 inline image per annum. Finally, we discuss the decision-based approach to forecast evaluation in relation to the MPC forecasts.

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