The Fan Chart: Implementation, Usage and Interpretation

Juan Manuel Julio

 

 

Abstract     

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 distribution. 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 central 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 "Inflation Report", this chart fulfills two objectives. First, informs the public opinion about the central bank inflation forecasts based on the "best" information 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 approaches 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 Colombian 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 (The program written in Visual Basic for Excel is available from the author.)

 

Key words: Fan Chart, Forecasting distribution, Statistical graphics, Inflation targeting, Inflation report. 

 

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