Fan chart or Monte Carlo simulations for assessing the uncertainty of inflation forecasts in Romania?

Figures & data

Figure 1. Fan chart for the consumer price index forecasts made by the Bank of England in 2011.¹

Source: Bank of England http://www.bankofengland.co.uk/publications/inflationreport/irfanch.htm.

Figure 2. Fan chart for projected rates of inflation in Romania based on a VAR model (Q4: 2012–Q4:2013).

Source: own computations.

Figure 3. Fan chart for projected rates of inflation in Romania based on a BVAR model (Q4: 2012–Q4:2013).

Source: own computations.

Figure 4. The interval of uncertainty for projections of inflation rate in Romania (from 2012–Q1 2014 Q4).

Source: National Bank of Romania (www.bnr.ro).

Table 1. Notations used to build the fan chart.

Current No.	Notation	Significance
1.	h	Forecast horizon
2.		Factor that affects the inflation rate
3.		More likely value for the ith factor at time t
4.		Balance of risk for the ith factor at time t
5.		Forecast error standard deviation for the ith factor at time t
6.	n2	Number of factors for which = 0,5
7.		Inflation rate at time t
8.		More likely inflation rate at time t
9.		Balance of risk for the inflation rate at time t
10.		Forecast error standard deviation for the inflation rate at time t
11.		Response of to an impulse in
12.		Bias indicator of ith factor at time t
13.		Bias indicator of the inflation rate at time t
14.		Inverse bias indicator of ith factor at time t
15.		Inverse bias indicator of the inflation rate at time t

Source: Author’s own calculation.

Table 2. The probabilities of getting inflation rates greater than some reference values in Romania.

	Probability P	Probability P’
Q4:2012	0.5023	0.5145
Q1:2013	0.5112	0.5155
Q2:2013	0.513	0.5162
Q3:2013	0.5132	0.5171
Q4:2013	0.514	0.535

Source: own computations.