Abstract

JULIO, JUAN MANUEL. The Fan Chart: Implementation, Usage and Interpretation. Rev.Colomb.Estad. [online]. 2006, vol.29, n.1, pp.109-131. ISSN 0120-1751.

The Fan Chart represents the forecasting distribution of a variable based on the information available at present. In comparison with the traditional forecast path and its corresponding symmetrical bands, the Fan Chart has two important advantages: First, it depicts the whole marginal forecast dis tribution. Second, this marginal distribution, on each period of time in the forecasting horizon, may be non symmetric. When this distribution is not symmetric, the probability that the variable takes on values above the cen tral path differs from the probability that it takes on values below it, which makes it a desirable tool to show the risks of not fulfilling pre established targets on future values of the variable. In the case of a Central Bank "In flation Report", this chart fulfills two objectives. First, informs the public opinion about the central bank inflation forecasts based on the "best" in formation available at the moment, an objective related to the transparency of the "inflation targeting" regime and the credibility of the policies issued to reach these targets. And second, organize the way the central bank ap proaches the problem of forecasting the inflation rate, which has to do with the development of the inflation report and its subject organization. In this note we present the actual Fan Chart implementation used by the Colom- bian Central Bank for its "Inflation Report", show an example of its proper usage, describe a sensible interpretation, and use of the software developed to compute it².

Keywords : Fan Chart; Forecasting distribution; Statistical graphics; Inflation targeting; Inflation report.

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