The Measurement and Behavior of Uncertainty: Evidence from the ECB Survey of Professional Forecasters

We use matched point and density forecasts of output growth and inflation from the ECB Survey of Professional Forecasters to derive measures of forecast uncertainty, forecast dispersion and forecast accuracy. We construct uncertainty measures from aggregate density functions as well as from individual histograms. The uncertainty measures display countercyclical behavior, and there is evidence of increased uncertainty for output growth and inflation since 2007. The results also indicate that uncertainty displays a very weak relationship with forecast dispersion, corroborating the findings of other recent studies that disagreement is not a valid proxy for uncertainty. In addition, we find no correspondence between movements in uncertainty and predictive accuracy, suggesting that time-varying conditional variance estimates may not provide a reliable proxy for uncertainty. Last, using a regression equation that can be interpreted as a (G)ARCH-M-type model, we find limited evidence of linkages between uncertainty and levels of output growth and inflation. Federal Reserve Bank of New York. We thank Kenneth Wallis and Eric Ghysels for useful comments and discussions. Earlier versions of the paper were presented at the 2012 Midwest Macroeconomics Meetings and 2012 International Symposium on Forecasting. We are also grateful to the conference participants for comments. Joshua Abel provided excellent research assistance. The views expressed in the paper are those of the authors and do not necessarily reflect those of the Federal Reserve Bank of New York or the Federal Reserve System. Corresponding author: Robert Rich. Address for correspondence: Research and Statistics Group, 33 Liberty Street, Federal Reserve Bank of New York, NY 10045-0001. Phone: 212 720-8100. Email: [email protected]