Inflation forecasts and their associated uncertainty play a crucial role in monetary policy decisions. This paper uses a quantile-regression approach to study the impact of business cycle developments on the entire distribution of euro-area inflation forecasts. This methodology allows us to capture possible non-linearities between output and prices.
Economic developments have a stronger impact on the left-hand side of the distribution of short-term inflation forecasts (low levels of inflation) rather than on the right-hand tail. The deterioration of business cycle conditions generate downside risks for inflation forecasts, while upside risks remain muted during phases of economic expansion. This finding remains robust to several business cycle indicators.
