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Structural Scenario Analysis with SVARs

Ivan Petrella, Juan Antolin-Diaz and Rubio-Ramírez, Juan Francisco

No 12579, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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.

Keywords: Conditional forecasts; Svars; Bayesian methods; Forward guidance; Stress testing (search for similar items in EconPapers)
JEL-codes: C32 C53 E47 (search for similar items in EconPapers)
Date: 2018-01
New Economics Papers: this item is included in nep-ecm, nep-ets and nep-mac
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Citations: View citations in EconPapers (15)

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