This paper argues that probability forecasts convey information on the uncertainties that surround macro-economic forecasts in a straightforward manner which is preferable to other alternatives, including the use of confidence intervals. Probability forecasts obtained using a small benchmark macroeconometric model as well as a number of other alternatives are presented and evaluated using recursive forecasts generated over the period 1999q1-2001q1. Out of sample probability forecasts of inflation and output growth are also provided over the period 2001q2-2003q1, and their implications discussed in relation to the Bank of England’s inflation target and the need to avoid recessions, both as separate events and jointly. The robustness of the results to parameter and model uncertainties is also investigated by a pragmatic implementation of the Bayesian model averaging approach.

Ce cahier a également été publié par le Centre interuniversitaire de recherche en économie quantitative (CIREQ) sous le numéro 22-2001.

There is by now a large consensus in modern monetary policy. This consensus has been built upon a dynamic general equilibrium model of optimal monetary policy as developed by, e.g., Goodfriend and King (1997), Clarida et al. (1999), Svensson (1999) and Woodford (2003). In this paper we extend the standard optimal monetary policy model by introducing nonlinearity into the Phillips curve. Under the specific form of nonlinearity proposed in our paper (which allows for convexity and concavity and secures closed form solutions), we show that the introduction of a nonlinear Phillips curve into the structure of the standard model in a discrete time and deterministic framework produces radical changes to the major conclusions regarding stability and the efficiency of monetary policy. We emphasize the following main results: (i) instead of a unique fixed point we end up with multiple equilibria; (ii) instead of saddle–path stability, for different sets of parameter values we may have saddle stability, totally unstable equilibria and chaotic attractors; (iii) for certain degrees of convexity and/or concavity of the Phillips curve, where