Uncertainty,information, and disagreement of economic forecasters

ABSTRACT

An information framework is proposed for studying uncertainty and disagreement of economic forecasters. This framework builds upon the mixture model of combining density forecasts through a systematic application of the information theory. The framework encompasses the measures used in the literature and leads to their generalizations. The focal measure is the Jensen–Shannon divergence of the mixture which admits Kullback–Leibler and mutual information representations. Illustrations include exploring the dynamics of the individual and aggregate uncertainty about the US inflation rate using the survey of professional forecasters (SPF). We show that the normalized entropy index corrects some of the distortions caused by changes of the design of the SPF over time. Bayesian hierarchical models are used to examine the association of the inflation uncertainty with the anticipated inflation and the dispersion of point forecasts. Implementation of the information framework based on the variance and Dirichlet model for capturing uncertainty about the probability distribution of the economic variable are briefly discussed.