Title: Forecasting with unknown unknowns: Censoring and fat tails on the Bank of England's monetary policy committee
Authors: James Mitchell - University of Warwick (United Kingdom) [presenting]
Martin Weale - Kings College London (United Kingdom)
Abstract: The production and evaluation of density forecasts is considered by paying attention to if and how the probabilities of outlying observations are quantified and communicated. Particular focus is given to the `censored' nature of the Bank of England's fan charts, given that - which is commonly ignored - they describe only the inner 90\% (best critical region) of the forecast distribution. A new estimator is proposed that fits a potentially skewed and fat tailed density to the inner observations, acknowledging that the outlying observations may be drawn from a different but unknown distribution. In forecasting applications, motivation for this could reflect the view that outlying forecast errors reflect (realised) unknown unknowns or events not expected to recur that should be censored before quantifying known unknowns.