Philippine Standard time

Measuring Uncertainty in Inflation Expectations

Inflation expectations are one of the key transmission channels of monetary policy. Well-anchored inflation expectations make it easier for a central bank to achieve its macroeconomic objectives, and thus could serve as one measure of its credibility and effectiveness of communication. Aside from central tendencies, the associated uncertainty and perception of risks surrounding inflation forecasts provide additional signals on how well-anchored inflation expectations are. This study exploits a unique dataset in the Bangko Sentral ng Pilipinas’ survey of professional forecasters, which contains (i) the respondents’ subjective probability distribution, to derive direct measures of uncertainty, as well as (ii) their perception of risks to the forecasts, to identify the factors driving their uncertainty. Following Zarnotwitz and Lambros (1987), the central tendencies of density forecasts are found to be highly correlated with the median of inflation forecasts. Applying text mining analysis, supply-side factors are found to be the most frequently used words in respondents’ perception of risks to their inflation outlook. Estimation results show that measures of uncertainty rise alongside actual inflation outturns and the occurrence of El Niño Southern Oscillation or ENSO weather events.


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