DP12579 Structural Scenario Analysis with SVARs

Author(s): Juan Antolin-Diaz, Ivan Petrella, Juan Francisco Rubio-Ramírez
Publication Date: January 2018
Date Revised: February 2020
Keyword(s): Bayesian methods, Conditional forecasts, forward guidance, Stress Testing, 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 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.