Staff Working Paper No. 1,196
Michael McMahon, Matthew Naylor, Ryan Rholes and Peter Rickards
We examine how central banks can effectively communicate forecast uncertainty in a two-part experimental study. Part I tests how different visual media – fan charts, dot plots, box-and-whisker plots, speedometers, and ranges – communicate uncertainty to both the general public and expert audiences. We find that fan charts are well understood and perform best at jointly conveying both expectations and uncertainty. Part II implements a novel dynamic information experiment with 1,600 UK participants across four stages, examining the effects of uncertainty communication on expectations and uncertainty perceptions over time. We find that while point forecasts anchor expectations marginally more than fan charts initially, forecast errors significantly de-anchor expectations, particularly for ‘unlucky’ errors that move inflation away from target. Critically, fan charts materially mitigate this de-anchoring, acting as an ‘insurance policy’ that helps protect central bank reputation. We also document that the public consistently underestimates the degree of uncertainty, and that communicating uncertainty via fan charts helps the public learn more realistic uncertainty perceptions. Our findings have important implications for central bank communication strategies.
Anchors aweigh? The effect of communicating forecast uncertainty
