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Joint Prediction Bands for Macroeconomic Risk Management

Listed author(s):
  • Farooq Akram

    ()

  • Andrew Binning

    ()

  • Junior Maih

    ()

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 offer will allow practitioners to better assess and communicate joint forecast probabilities, a criticism that has been leveled at central bank communications.

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File URL: https://www.bi.edu/contentassets/e9c498f5290f4364bc2ae8d874d183b6/working_camp_5-2016.pdf
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Paper provided by Centre for Applied Macro- and Petroleum economics (CAMP), BI Norwegian Business School in its series Working Papers with number No 5/2016.

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Length: 22 pages
Date of creation: May 2016
Handle: RePEc:bny:wpaper:0045
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  1. Andrew Binning, 2016. "Implementing the Zero Lower Bound in an Estimated Regime-Switching DSGE Model," Working Papers No 3/2016, Centre for Applied Macro- and Petroleum economics (CAMP), BI Norwegian Business School.
  2. Adolfson, Malin & Laséen, Stefan & Lindé, Jesper & Villani, Mattias, 2005. "Are Constant Interest Rate Forecasts Modest Interventions? Evidence from an Estimated Open Economy DSGE Model of the Euro Area," Working Paper Series 180, Sveriges Riksbank (Central Bank of Sweden).
  3. Maik H. Wolters, 2015. "Evaluating Point and Density Forecasts of DSGE Models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 30(1), pages 74-96, 01.
  4. Hugo Gerard & Kristoffer Nimark, 2008. "Combining Multivariate Density Forecasts Using Predictive Criteria," RBA Research Discussion Papers rdp2008-02, Reserve Bank of Australia.
  5. Dag Kolsrud, 2015. "A Time‐Simultaneous Prediction Box for a Multivariate Time Series," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 34(8), pages 675-693, December.
  6. Thomas Doan & Robert B. Litterman & Christopher A. Sims, 1983. "Forecasting and Conditional Projection Using Realistic Prior Distributions," NBER Working Papers 1202, National Bureau of Economic Research, Inc.
  7. Òscar Jordà & Massimiliano Marcellino, 2010. "Path forecast evaluation," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 25(4), pages 635-662.
  8. Leeper, Eric M. & Zha, Tao, 2003. "Modest policy interventions," Journal of Monetary Economics, Elsevier, vol. 50(8), pages 1673-1700, November.
  9. Robertson, John C & Tallman, Ellis W & Whiteman, Charles H, 2005. "Forecasting Using Relative Entropy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(3), pages 383-401, June.
  10. Malin Adolfson & Stefan Laséen & Jesper Lindé & Mattias Villani, 2005. "Are Constant Interest Rate Forecasts Modest Policy Interventions? Evidence from a Dynamic Open-Economy Model," International Finance, Wiley Blackwell, vol. 8(3), pages 509-544, December.
  11. Cogley, Timothy & Morozov, Sergei & Sargent, Thomas J., 2005. "Bayesian fan charts for U.K. inflation: Forecasting and sources of uncertainty in an evolving monetary system," Journal of Economic Dynamics and Control, Elsevier, vol. 29(11), pages 1893-1925, November.
  12. Ragna Alstadheim & Hilde C. Bjørnland & Junior Maih, 2013. "Do central banks respond to exchange rate movements? A Markov-switching structural investigation," Working Paper 2013/24, Norges Bank.
  13. Eric Leeper, 2003. "An "Inflation Reports" Report," NBER Working Papers 10089, National Bureau of Economic Research, Inc.
  14. Michael Wolf & Dan Wunderli, 2012. "Bootstrap joint prediction regions," ECON - Working Papers 064, Department of Economics - University of Zurich, revised May 2013.
  15. Rotemberg, Julio J, 1982. "Sticky Prices in the United States," Journal of Political Economy, University of Chicago Press, vol. 90(6), pages 1187-1211, December.
  16. Michal Franta & Jozef Baruník & Roman Horváth & Katerina Smídková, 2014. "Are Bayesian Fan Charts Useful? The Effect of Zero Lower Bound and Evaluation of Financial Stability Stress Tests," International Journal of Central Banking, International Journal of Central Banking, vol. 10(1), pages 159-188, March.
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