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Investigating uncertainty in macroeconomic forecasts by stochastic simulation

  • Debby Lanser

    ()

  • Henk Kranendonk

    ()

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    We investigate four sources of uncertainty with CPB’s macroeconomic model SAFFIER: provisional data, exogenous variables, model parameters and residuals of behavioural equations. Uncertainty is an inherent attribute of any forecast. We apply a Monte Carlo simulation technique to calculate standard errors for the short-term and medium-term horizon for GDP and eight other macroeconomic variables. The results demonstrate that the main contribution to the total variance of a medium-term forecast emanates from the uncertainty in the exogenous variables. For the short-term forecast both exogenous variables and provisional data are most relevant.

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    Paper provided by CPB Netherlands Bureau for Economic Policy Analysis in its series CPB Discussion Paper with number 112.

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    Date of creation: Sep 2008
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    Handle: RePEc:cpb:discus:112
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    1. Garrat, A. & Lee, K. & Pesaran, M.H. & Shin, Y., 2000. "Forecast Uncertainties in Macroeconometric Modelling: An Application to the UK Economy," Cambridge Working Papers in Economics 0004, Faculty of Economics, University of Cambridge.
    2. Canova, Fabio, 1995. "Sensitivity Analysis and Model Evaluation in Simulated Dynamic General Equilibrium Economies," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(2), pages 477-501, May.
    3. Ray C. Fair, 2001. "Bootstrapping Macroeconometric Models," Cowles Foundation Discussion Papers 1345, Cowles Foundation for Research in Economics, Yale University, revised Jun 2003.
    4. Alexei Onatski & Noah Williams, 2003. "Modeling Model Uncertainty," NBER Working Papers 9566, National Bureau of Economic Research, Inc.
    5. Nigel Pain & Ray Barrell & Dawn Holland, 2001. "Openness, integration and transition: prospects and policies for economies in transition," NIESR Discussion Papers 165, National Institute of Economic and Social Research.
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