Empirical measures of inflation uncertainty: a cautionary note
A direct, ex ante, measure of inflation uncertainty in the US is compared with a number of proxies used in empirical studies. The direct estimate is the root mean subjective variance of the probability distributions for inflation reported by respondents to the ASA/NBER survey. The proxies include forecast standard deviations from ARIMA, ARCH and structural models of inflation. These proxies are not significantly correlated with the direct measure, nor with one another. Use of the proxies leads to incorrect inferences about the correlation between inflation and inflation uncertainty, and between inflation uncertainty and the real interest rate.