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A non-parametric model-based approach to uncertainty and risk analysis of macroeconomic forecast

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  • Claudia Miani

    ()
    (Bank of Italy)

  • Stefano Siviero

    ()
    (Bank of Italy)

Abstract

It 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 Info

Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 758.

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Date of creation: Apr 2010
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Handle: RePEc:bdi:wptemi:td_758_10

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Related research

Keywords: macroeconomic forecasts; stochastic simulations; balance of risks; uncertainty; fan-charts;

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Cited by:
  1. Claudia Miani & Giulio Nicoletti & Alessandro Notarpietro & Massimiliano Pisani, 2012. "Banks’ balance sheets and the macroeconomy in the Bank of Italy Quarterly Model," Questioni di Economia e Finanza (Occasional Papers) 135, Bank of Italy, Economic Research and International Relations Area.
  2. 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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