A non-parametric model-based approach to uncertainty and risk analysis of macroeconomic forecast
AbstractIt has increasingly become standard practice to supplement point macroeconomic forecasts with an appraisal of the degree of uncertainty and the prevailing direction of risks. Several alternative approaches have been proposed in the literature to compute the probability distribution of macroeconomic forecasts; all of them rely on combining the predictive density of model-based forecasts with subjective judgment about the direction and intensity of prevailing risks. We propose a non-parametric, model-based simulation approach, which does not require specific assumptions to be made regarding the probability distribution of the sources of risk. The probability distribution of macroeconomic forecasts is computed as the result of model-based stochastic simulations which rely on re-sampling from the historical distribution of risk factors and are designed to deliver the desired degree of skewness. By contrast, other approaches typically make a specific, parametric assumption about the distribution of risk factors. The approach is illustrated using the Bank of Italy’s Quarterly Macroeconometric Model. The results suggest that the distribution of macroeconomic forecasts quickly tends to become symmetric, even if all risk factors are assumed to be asymmetrically distributed.
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Bibliographic InfoPaper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 758.
Date of creation: Apr 2010
Date of revision:
macroeconomic forecasts; stochastic simulations; balance of risks; uncertainty; fan-charts;
Find related papers by JEL classification:
- C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
- C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
- E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-05-08 (All new papers)
- NEP-ECM-2010-05-08 (Econometrics)
- NEP-ETS-2010-05-08 (Econometric Time Series)
- NEP-FOR-2010-05-08 (Forecasting)
- NEP-RMG-2010-05-08 (Risk Management)
- NEP-UPT-2010-05-08 (Utility Models & Prospect Theory)
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- Maximiano Pinheiro & Paulo Soares Esteves, 2008.
"On the uncertainty and risks of macroeconomic forecasts: Combining judgements with sample and model information,"
w200821, Banco de Portugal, Economics and Research Department.
- Maximiano Pinheiro & Paulo Esteves, 2012. "On the uncertainty and risks of macroeconomic forecasts: combining judgements with sample and model information," Empirical Economics, Springer, vol. 42(3), pages 639-665, June.
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