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Forecast Uncertainties in Macroeconomics Modelling: An Application to the UK Economy

This paper argues that probability forecasts convey information on the uncertainties that surround macro-economic forecast in straightforward manner which is preferable to other alternatives, including the use of confidence intervals. Point and probability forecasts obtained using a small macro-economic model are presented and evaluated using recursive forecasts generated from the model over the period 1999-2000. Out of sample probability forecasts of inflation and output growth are also provided over the period 2001-2003, 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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File URL: http://www.econ.ed.ac.uk/papers/id64_esedps.pdf
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Paper provided by Edinburgh School of Economics, University of Edinburgh in its series ESE Discussion Papers with number 64.

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Length: 39
Date of creation: Dec 2001
Handle: RePEc:edn:esedps:64
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  1. Pesaran, M. H. & Shin, Y. & Smith, R. J., 1997. "Structural Analysis of Vector Error Correction Models with Exogenous I(1) Variables," Cambridge Working Papers in Economics 9706, Faculty of Economics, University of Cambridge.
  2. repec:sae:niesru:v:156:y::i:1:p:72-79 is not listed on IDEAS
  3. Carmen Fernandez & Eduardo Ley & Mark Steel, 2001. "Model uncertainty in cross-country growth regressions," Econometrics 0110002, EconWPA.
  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. Anthony Garratt & Kevin Lee & Mohammad Hashem Pesaran & Yongcheol Shin, 2001. "A long run structural macroeconometric model of the UK," ESE Discussion Papers 35, Edinburgh School of Economics, University of Edinburgh.
  6. Fernandez, Carmen & Ley, Eduardo & Steel, Mark F. J., 2001. "Benchmark priors for Bayesian model averaging," Journal of Econometrics, Elsevier, vol. 100(2), pages 381-427, February.
  7. Harbo, Ingrid, et al, 1998. "Asymptotic Inference on Cointegrating Rank in Partial Systems," Journal of Business & Economic Statistics, American Statistical Association, vol. 16(4), pages 388-399, October.
  8. repec:sae:niesru:v:167:y::i:1:p:106-112 is not listed on IDEAS
  9. Don Harding & Adrian Pagan, 2000. "Disecting the Cycle: A Methodological Investigation," Econometric Society World Congress 2000 Contributed Papers 1164, Econometric Society.
  10. Clemen, Robert T., 1989. "Combining forecasts: A review and annotated bibliography," International Journal of Forecasting, Elsevier, vol. 5(4), pages 559-583.
  11. Francis X. Diebold & Jose A. Lopez, 1996. "Forecast Evaluation and Combination," NBER Technical Working Papers 0192, National Bureau of Economic Research, Inc.
  12. Nobay, A. R. & Peel, D. A., 2000. "Optimal monetary policy with a nonlinear Phillips curve," Economics Letters, Elsevier, vol. 67(2), pages 159-164, May.
  13. Garratt, Anthony & Lee, Kevin C & Pesaran, M. Hashem & Shin, Yongcheol, 1998. "A Structural Cointegrating VAR Approach to Macroeconometric Modelling," Cambridge Working Papers in Economics 9823, Faculty of Economics, University of Cambridge.
  14. repec:sae:niesru:v:156:y::i:1:p:55-62 is not listed on IDEAS
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