The Bank of Finland's short-term density forecast for inflation

Abstract

The paper discusses density forecasting in general and the Bank of Finland's short-term density forecast for inflation in particular. An additional topic of interest is incorporating subjective judgement into the forecast distribution.In general, estimating an entire distribution for the future values of a variable should be aimed at.Another goal should be a systematic method for taking subjective assessments into account.As to projecting future inflation, the Bank of England and Sveriges Riksbank have been forerunners in making and publishing subjectively adjusted density forecasts.Particularly the presentation in the form of a fan chart has attracted attention.Better documentation and the ease of use imply that the Riksbank method is preferable for the Bank of Finland use, while the need for some modifications arises from differences in the forecasting exercises.The discussion on the properties of the NIPE forecast, for which the density distribution and the fan chart are compiled, implicates in addition that the Riksbank model is suitable.Key words: inflation forecast, density forecasting, subjective judgement, fan chart