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Forecast Uncertainties in Macroeconomic Modeling: An Application to the U.K. Economy

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Abstract

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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Suggested Citation

  • Garratt A. & Lee K. & Pesaran M.H. & Shin Y., 2003. "Forecast Uncertainties in Macroeconomic Modeling: An Application to the U.K. Economy," Journal of the American Statistical Association, American Statistical Association, vol. 98, pages 829-838, January.
    • Handle: RePEc:bes:jnlasa:v:98:y:2003:p:829-838
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    More about this item

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications

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