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Estimating Event Probabilities from Macroeconomic Models Using Stochastic Simulation

  • Ray C. Fair

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.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Technical Working Papers with number 0111.

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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
Handle: RePEc:nbr:nberte:0111
Note: EFG
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  1. James H. Stock & Mark W. Watson, 1989. "New Indexes of Coincident and Leading Economic Indicators," NBER Chapters, in: NBER Macroeconomics Annual 1989, Volume 4, pages 351-409 National Bureau of Economic Research, Inc.
  2. 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.
  3. Francis X. Diebold & Glenn D. Rudebusch, 1987. "Scoring the leading indicators," Special Studies Papers 206, Board of Governors of the Federal Reserve System (U.S.).
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