The Extraction of the Probability Density Functions of the Inflation Forecast Utilizing the Forward Looking Judgment Criteria

The inflation forecast via specifying the uncertainties in the economy, is de facto in vogue between the most Central Banks of the world to advocate the” Inflation Targeting Strategy “and to follow up the specific monetary policies to reinstate the inflation into its targeted path, per se. In this paper an attempt is made to investigate de jure, how the risks balances of various macroeconomic variables may be linked to the uncertainty inherited in the inflation forecasting, in toto. In this context, we have made a key assumption that the inflation uncertainty is derived from the observed uncertainty among the certain macroeconomic variables because the forecasted CPI is highly elastic pari passu with these macroeconomic variables . In other words, the inflation forecast skewness and the probability Density Function is technically derived from the uncertainty discerned in some macroeconomic variables, A fortiori. Subsequently, we have depicted the Fan Chart for inflation forecast, Ipso facto. Though, it is an axiomatic fact that, in most of the cases, the uncertainties in these macro economic variables are gleaned from their respective historical standard deviations. However we have contemplated to subjectively adjust these uncertainties considering the value judgments for future course of economic developments, if and only if there is a plausible reason for less or more uncertainties compared to the historical standard deviations of these macroeconomic variables, quid pro qua. Besides, we performed the judgmental assessment of risks balances indicating that whether the distribution functions of probability density are symmetric or not. Thus, we have observed that the baselines for distributions of the macro economic variables are symmetric and Gaussian, if the standard deviations are based upon the historical data and similarly, any departure from the baseline can prima facie be construed to correlate with future inflation. Finally, the Fan Chart of inflation forecast related to four quarters leading to the September 2019 is presented as an operational sample. Furthermore, we have found that, the skewness of inflation forecasts has tendency for the higher inflation due to dynamic impacts of some macro economic variables on the rate of inflation, Sine qua non.