Estimating Event Probabilities from Macroeconomic Models Using Stochastic Simulation
This paper shows how probability questions can be answered within the context of macroeconometric models by using stochastic simulation. One can estimate, for example, the probability of a recession occurring within some fixed period in the future. Probability estimates are presented for two recessionary events and one inflationary event. An advantage of the present procedure is that the probabilities estimated from the stochastic simulation are objective in the sense that they are based on the use of estimated distributions. They are consistent with the probability structure of the model. This paper also shows that estimated probabilities can be used in the evaluation of a model, and an example of this type of evaluation is presented.
|Date of creation:||Aug 1991|
|Date of revision:|
|Publication status:||published as Business Cycles,Indicators and Forecasting, edited by James Stock and Mark Watson, Studies in Business Cycles Vol 28, Chicago: University of Chicago Press, 1993|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
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- Stock, J.H. & Watson, M.W., 1989.
"New Indexes Of Coincident And Leading Economic Indicators,"
178d, Harvard - J.F. Kennedy School of Government.
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The Journal of Business,
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International Economic Review,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 21(2), pages 355-78, June.
- 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.
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