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Joint prediction bands for macroeconomic risk management

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Abstract

In this paper we address the issue of assessing and communicating the joint probabilities implied by density forecasts from multivariate time series models. We focus our attention in three areas. First, we investigate a new method of producing fan charts that better communicates the uncertainty present in forecasts from multivariate time series models. Second, we suggest a new measure for assessing the plausibility of non-central point forecasts. And third, we describe how to use the density forecasts from a multivariate time series model to assess the probability of a set of future events occurring. An additional novelty of this paper is our use of a regime-switching DSGE model with an occasionally binding zero lower bound constraint, estimated on US data, to produce the density forecasts. The tools we off er will allow practitioners to better assess and communicate joint forecast probabilities, a criticism that has been leveled at central bank communications.

Suggested Citation

  • Farooq Akram & Andrew Binning & Junior Maih, 2016. "Joint prediction bands for macroeconomic risk management," Working Paper 2016/7, Norges Bank.
  • Handle: RePEc:bno:worpap:2016_07
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    1. repec:gei:journl:v:4:y:2017:i:1:p:75-101 is not listed on IDEAS
    2. Syed Tehseen Jawaid, Abdul Waheed, 2017. "Uncertainty and Risk Analysis of Pakistan's Regional Trade: Fan Chart Approach," Journal of Management Sciences, Geist Science, Iqra University, Faculty of Business Administration, vol. 4(1), pages 55-81, March.

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    More about this item

    Keywords

    Monetary Policy; Fancharts; DSGE; Zero Lower Bound; Regime-switching; Bayesian Estimation;
    All these keywords.

    JEL classification:

    • C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling
    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E1 - Macroeconomics and Monetary Economics - - General Aggregative Models
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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