Working Paper

Incorporating judgement in fan charts

Abstract: Within a decision-making group, such as the monetary-policy committee of a central bank, group members often hold differing views about the future of key economic variables. Such differences of opinion can be thought of as reflecting differing sets of judgement. This paper suggests modelling each agent's judgement as one scenario in a macroeconomic model. Each judgement set has a specific dynamic impact on the system, and accordingly, a particular predictive density - or fan chart - associated with it. A weighted linear combination of the predictive densities yields a final predictive density that correctly reflects the uncertainty perceived by the agents generating the forecast. In a model-based environment, this framework allows judgement to be incorporated into fan charts in a formalised manner.

Keywords: Economic forecasting; Statistical methods; Monetary policy;

Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: Finance and Economics Discussion Series

Publication Date: 2006

Number: 2006-39