Reporting the distribution of the inflation projection

This article examines the methodology used by the Central Reserve Bank of Peru to make inflation forecasts, drawing on the practices of the Bank of England and the Swedish Central Bank. The study addresses how inflation forecasts should reflect uncertainty and asymmetric risks rather than relying solely on point estimates, which is crucial for effective monetary policy and communication with the public. Monte Carlo simulations and a two-part normal distribution function are used to calculate the parameters of the inflation forecast. The results show significant variations in the asymmetry and uncertainty associated with the forecast, and it is suggested that the balance of risks plays an important role in determining inflation expectations. The monetary policy implications underscore the importance of effectively communicating the risks surrounding inflation forecasts to optimize the central bank’s credibility and transparency, thereby facilitating decision-making by economic agents. (Abstract and audio: Department of Economic Publications)