evolution of such disagreements has been shown to affect the probability distribution of forecast errors (Bachman, Elstner and Sims 2012; Patton and Timmerman 2010). Three risk indicators are used in this exercise:<sup>2</sup>

- **Equity prices.** Equity prices futures—especially the Standard and Poor’s S&P500 Index—are positively correlated with prospects for the U.S. and global economy. Their implied volatility signals changes in global investors’ risk aversion (Adrian and Shin 2014, Bekaert, Hoerova and Lo Duca 2013). The implied volatility of the S&P 500 returns at 6- and 18-months-ahead option contracts at 100 percent moneyness is obtained from Bloomberg and used as a proxy for equity market uncertainty.

- **Term spreads.** Term spreads (difference between long and short-term nominal interest rates) embed both inflation and real equilibrium interest rate expectations, both of which are tightly connected to growth prospects (Cieslak and Povala 2014). A rapid decline in term spreads is seen as a predictor of increased recession risks.<sup>3</sup> The dispersion of term spread forecasts therefore captures uncertainty surrounding growth prospects while a left hand shift in their distribution signals a predominance of downside risks. Current and nextyear term spread forecasts are compiled from monthly surveys published by Consensus Economics from January 2006 to March 2016. A global term spread is proxied by GDPweighted (at 2010 prices and exchange rates) term spreads across G20 economies.

- **Average of Brent and WTI crude oil forward prices.** Abrupt changes in oil prices make growth prospects more uncertain. A supply-driven decline in oil prices tends to improve global growth prospects (Baffes et al 2015; Kilian 2014). As in the case of S&P 500, the implied volatility at 100 percent moneyness of Brent and WTI crude oil prices at 6- and 18-months-ahead option contracts are obtained from Bloomberg and used as a proxy for crude oil market uncertainty. Crude oil prices implied volatility is obtained by taking a simple average of that of Brent and WTI.

For each risk factor, its forecast distribution captures both the degree of uncertainty and the balance of risks:

- The degree of uncertainty surrounding each risk factor is captured by the dispersion of its forecast distribution. The dispersions for the Brent and WTI prices and S&P 500 returns risk factors are measured by the implied volatility of at-the-money forward option prices.<sup>4</sup> For the June GEP forecast vintages, the 6-month maturity implied volatility is used for current year forecast whereas 18-month maturity implied volatility is used for next year

> 2 Kannan and Elekdag (2009) also include U.S. inflation as a risk factor to proxy the risks to U.S. monetary policy. However, for most countries, especially emerging markets and developing countries (EMDE), the most immediate risks to monetary policy are already captured by equity prices and term spreads.

> 3 Harvey (1989); Estrella and Hardouvelis (1991); Estrella and Mishkin (1996); Haubrich and Dombrosky (1996); Dueker (1997); Kozicki (1997); Dotsey (1998); Stock and Watson (2003); and Kao et al. (2013).

> 4 The data sample is from January 2006 to April 2016.

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