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Forecast Uncertainties In Macroeconometric Modelling: An Application to the UK Economy

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Author Info

  • Garratt, Anthony

    (University of Cambridge)

  • Kevin Lee

    (University of Leicester)

  • M Hashem Pesaran

    (Trinity College, Cambridge)

  • Yongcheol Shin

    (University of Edinburgh)

Abstract

This paper argues that probability forecasts convey information on the uncertainties that surround macro-economic forecasts in a straightforward manner which is preferable to other alternatives, including the use of confidence intervals. Point and probability forecasts obtained using a small macro-econometric model, are presented and evaluated using recursive forecasts generated from the model over the period 1999q1-2000q1. Out of sample probability forecasts of inflation and output growth are also provided over the period 2001q2-2003q1, and their implications discussed in relation to the Bank of England's inflation target and the need to avoid recessions, both as separate events and jointly. It is also shown how the probability forecasts can be used to provide insights on the inter-relationship of output growth and inflation at different horizons.

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Bibliographic Info

Paper provided by Royal Economic Society in its series Royal Economic Society Annual Conference 2002 with number 82.

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Date of creation: 29 Aug 2002
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Handle: RePEc:ecj:ac2002:82

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Web page: http://www.res.org.uk/society/annualconf.asp
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  1. Kenneth D. West, 1994. "Asymptotic Inference About Predictive Ability," Macroeconomics 9410002, EconWPA.
  2. Ray C. Fair, 1991. "Estimating Event Probabilities from Macroeconomic Models Using Stochastic Simulation," NBER Technical Working Papers 0111, National Bureau of Economic Research, Inc.
  3. Pesaran,H.M. & Shin,Y., 1995. "Long-Run Structural Modelling," Cambridge Working Papers in Economics 9419, Faculty of Economics, University of Cambridge.
  4. Ray C. Fair, 1978. "Estimating the Expected Predictive Accuracy of Econometric Models," Cowles Foundation Discussion Papers 480, Cowles Foundation for Research in Economics, Yale University.
  5. A Garratt & K Lee & M H Pesaran & Yongcheol Shin, 1999. "A structural cointegrating VAR approach to macroeconometric modelling," ESE Discussion Papers 8, Edinburgh School of Economics, University of Edinburgh.
  6. Andrew P. Blake, 1996. "Forecast Error Bounds By Stochastic Simulation," National Institute Economic Review, National Institute of Economic and Social Research, vol. 156(1), pages 72-79, May.
  7. Koop, Gary & Pesaran, M. Hashem & Potter, Simon M., 1996. "Impulse response analysis in nonlinear multivariate models," Journal of Econometrics, Elsevier, vol. 74(1), pages 119-147, September.
  8. Pesaran, M. Hashem & Shin, Yongcheol & Smith, Richard J., 2000. "Structural analysis of vector error correction models with exogenous I(1) variables," Journal of Econometrics, Elsevier, vol. 97(2), pages 293-343, August.
  9. Jeremy Berkowitz, 1999. "Evaluating the forecasts of risk models," Finance and Economics Discussion Series 1999-11, Board of Governors of the Federal Reserve System (U.S.).
  10. Francis X. Diebold & Todd A. Gunther & Anthony S. Tay, 1997. "Evaluating Density Forecasts," NBER Technical Working Papers 0215, National Bureau of Economic Research, Inc.
  11. Kenneth F. Wallis, 1999. "Asymmetric density forecasts of inflation and the Bank of England's fan chart," National Institute Economic Review, National Institute of Economic and Social Research, vol. 167(1), pages 106-112, January.
  12. Don Harding & Adrian Pagan, 2000. "Disecting the Cycle: A Methodological Investigation," Econometric Society World Congress 2000 Contributed Papers 1164, Econometric Society.
  13. Granger, C.W.J. & Pesaran, M. H., 1999. "Economic and Statistical Measures of Forecast Accuracy," Cambridge Working Papers in Economics 9910, Faculty of Economics, University of Cambridge.
  14. Francis X. Diebold & Jinyong Hahn & Anthony S. Tay, 1999. "Multivariate Density Forecast Evaluation And Calibration In Financial Risk Management: High-Frequency Returns On Foreign Exchange," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 661-673, November.
  15. Anthony Garratt & Kevin Lee & M. Hashem Pesaran & Yongcheol Shin, 2003. "A Long run structural macroeconometric model of the UK," Economic Journal, Royal Economic Society, vol. 113(487), pages 412-455, 04.
  16. David Poulizac & Martin Weale & Garry Young, 1996. "The Performance of National Institute Economic Forecasts," National Institute Economic Review, National Institute of Economic and Social Research, vol. 156(1), pages 55-62, May.
  17. A. Robert Nobay & David A. Peel, 1998. "Optimal Monetary Policy in a Model of Asymmetric Central Bank Preferences," FMG Discussion Papers dp306, Financial Markets Group.
  18. Granger, C.W.J. & Pesaran, H., 1996. "A Decision_Theoretic Approach to Forecast Evaluation," Cambridge Working Papers in Economics 9618, Faculty of Economics, University of Cambridge.
  19. Holly,Sean & Weale,Martin (ed.), 2000. "Econometric Modelling," Cambridge Books, Cambridge University Press, number 9780521650694, October.
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