Characterizing and Communicating the Balance of Risks of Macroeconomic Forecasts: A Predictive Density Approach for Colombia

Juan C. Méndez-Vizcaíno, Alexander Guarín López, César Anzola-Bravo and Anderson Grajales-Olarte

Borradores de Economia from Banco de la Republica de Colombia

Abstract: Since July 2021, Banco de la República strengthened its forecasting process and communication instruments, by involving predictive densities in the projections of its models, PATACON and 4GM. This paper presents the main theoretical and empirical elements of the predictive density approach for macroeconomic forecasting. This model-based methodology allows to characterize the balance of risks of the economy, and to quantify their effects through a joint probability distribution of forecasts. We estimate this distribution based on the simulation of DSGE models, preserving the general equilibrium relationships and their macroeconomic consistency. We also illustrate the technical criteria used to represent prospective factors of risk through the probability distributions of shocks. **** RESUMEN: Desde julio de 2021, el Banco de la República fortaleció su proceso de pronóstico y sus instrumentos de comunicación al incorporar densidades predictivas en las proyecciones de sus modelos, PATACON y 4GM. Este artículo presenta los principales elementos teóricos y empíricos del enfoque de densidad predictiva para los pronósticos macroeconómicos. Esta metodología basada en modelos permite caracterizar el balance de riesgos de la economía y cuantificar sus efectos mediante una distribución de probabilidad conjunta de los pronósticos. Esta distribución se estima mediante la simulación de los modelos DSGE, preservando las relaciones de equilibrio general y la coherencia macroeconómica. También se ilustran los criterios técnicos utilizados para representar los factores de riesgo prospectivos a través de las distribuciones de probabilidad de los choques.

Keywords: Macroeconomic forecasts; balance of risks; uncertainty; Bayesian forecasting; monetary policy models; Pronósticos macroeconómicos; balance de riesgos; incertidumbre; pronósticos bayesianos; modelos de política monetaria (search for similar items in EconPapers)
JEL-codes: C11 C53 E17 E52 (search for similar items in EconPapers)
Pages: 17
Date: 2021-10
New Economics Papers: this item is included in nep-dge, nep-for, nep-mac, nep-ore and nep-rmg
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https://doi.org/10.32468/be.1178

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Persistent link: https://EconPapers.repec.org/RePEc:bdr:borrec:1178

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