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.

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Bibliographic Reference

Antolin-Diaz, J, Petrella, I and Rubio-Ramírez, J. 2018. ' Structural Scenario Analysis with SVARs'. London, Centre for Economic Policy Research.