PROCEEDINGS May 15, 16, 17, 18, 2005 - Casualty Actuarial Society

214 MODELING FINANCIAL SCENARIOSFIGURE 3Distribution of 10-Year Real Interest Rate ProjectionPeriod:1Monthto50YearsThe mean one-year inflation rate begins at 1.6% and movesto 4.8% by the end of 50 years, both in line with the model parameters.The 1st—99th percentile range of the one-year inflationrate after 10 years is ¡3:7% to +12:9%. Although the UnitedStates has not experienced deflation over an entire year since1954, it seems quite appropriate to assign positive probability tothis event.From the description in Section 3, recall that the 10-year inflationrate is derived from the expected path of inflation overthe next ten years. Given the assumption of mean reversion ofinflation, it is expected that there is less uncertainty inherent inpredicting longer-term inflation rates. The simulation confirmsthis–the mean 10-year inflation rate begins at 3.6% and movesto 4.5% by the end of 50 years, closer to the long-term meanparameter of 4.8%. Also, the 1st—99th percentile range of the10-year inflation rate after 10 years is 2.0% to 6.9%, demon-