DP12579 Structural Scenario Analysis with SVARs

Author(s): Juan Antolin-Diaz, Ivan Petrella, Juan Francisco Rubio-Ramírez
Publication Date: January 2018
Date Revised: May 2019
Keyword(s): Bayesian methods, Conditional forecasts, probability distribution, SVARs
JEL(s): C32, C53, E47
Programme Areas: Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=12579

Macroeconomists seeking to construct conditional forecasts often face a choice between taking a stand on the details of a fully-specified structural model or to rely on empirical correlations from vector autoregression (VAR) models and remain silent about the underlying causal mechanisms. This paper develops tools for constructing ``structural scenarios'' using identified structural VARs that can be given an economic interpretation. We provide a unified and transparent treatment of conditional forecasting and structural scenario analysis and relate our approach to entropic forecast tilting. We provide for a careful treatment of uncertainty, making the methods suitable for density forecasting and risk assessment. We also propose an approach to assess and compare the plausibility of alternative scenarios. We illustrate our methods with two examples: comparing alternative monetary policy options and stress testing the reaction of bank profitability to an economic recession.