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.