Title: On the effect of the Bank of England expected inflation uncertainty on private forecasters' risk assessments
Authors: Carlos Diaz - University of Leicester (United Kingdom) [presenting]
Abstract: There is a large body of literature on the effect of central bank forecasting and communication on the formation of private agents' expectations. Most studies focus on the extent by which central bank point forecasts act as focal points for private forecasts, or for their dispersion. The aim is to determine whether measures of expected inflation uncertainty drive to some extent private agents' inflation risk assessment. A measure of inflation uncertainty based on the revisions of the Bank of England's density forecasts has been previously proposed. This measure accounted for the level of uncertainty that the bank expects that information perceived in a given quarter will have on future inflation. The determinants of this measure is analysed using a structural dynamic factor model formed of 50 key macroeconomic and financial variables of the British economy that tries to mimic the bank's process of information acquisition. Once the reaction function of the bank's measure of uncertainty is analysed, we study whether it has any effect on the responses to the survey of external forecasters. Given the importance of private inflation risk assessment on the asset pricing mechanisms, knowing the extent to which central banks can affect private expectations in this way could be used as another measure of unconventional monetary policy.