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Discussion Paper Details

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Title: Structural Scenario Analysis with SVARs

Author(s): Juan Antolin-Diaz, Ivan Petrella and Juan Francisco Rubio-Ramírez

Publication Date: January 2018

Keyword(s): Bayesian methods, Conditional forecasts, forward guidance, Stress Testing and SVARs

Programme Area(s): Monetary Economics and Fluctuations

Abstract: Macroeconomists seeking to construct conditional forecasts often face a choice between taking a stand on the details of a fully-specified structural model or relying on empirical correlations from vector autoregressions and remain silent about the underlying causal mechanisms. This paper develops tools for constructing ``structural scenarios'' that can be given an economic interpretation using identified structural VARs. We provide a unified and transparent treatment of conditional forecasting and structural scenario analysis and relate our approach to entropic forecast tilting. We advocate for a careful treatment of uncertainty, making the methods suitable for density forecasting and risk assessment. We also propose a metric to assess and compare the plausibility of alternative scenarios. We illustrate our methods with two applications: assessing the power of forward guidance about future interest rate policies and stress testing the reaction of bank profitability to an economic recession.

For full details and related downloads, please visit: https://cepr.org/active/publications/discussion_papers/dp.php?dpno=12579

Bibliographic Reference

Antolin-Diaz, J, Petrella, I and Rubio-Ramírez, J. 2018. ' Structural Scenario Analysis with SVARs'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=12579