Working Paper Series no. 407: Tails of Inflation Forecasts and Tales of Monetary Policy

Abstract

We introduce a new measure called Inflation-at-Risk (I@R) associated with (left and right) tail inflation risk. We estimate I@R using survey-based density forecasts. We show that it contains information not covered by usual inflation risk indicators which focus on inflation uncertainty and do not distinguish between the risks of low or high future inflation outcomes. Not only the extent but also the asymmetry of inflation risks evolve over time. Moreover, changes in this asymmetry have an impact on future inflation realizations as well as on the current interest rate central banks target.

Philippe Andrade, Eric Ghysels and Julien Idier
November 2012

Classification JEL : E31, E37, E43, E52

Keywords : inflation expectations, risk, uncertainty, survey data, inflation dynamics, monetary policy