Measuring Uncertainty over the Medium Term

Bernard Babineau and Nathanael Braun

Working Papers-Department of Finance Canada from Department of Finance Canada

Abstract: Medium-term (five-year) fiscal planning is complicated by uncertainty surrounding projections of real GDP. The slowdown in growth rate in the late 1970s and the recent upsurge in growth during the late 1990s provide lessons on how unanticipated movements in underlying trends can have a major impact on fiscal planning. This paper utilises linear and nonlinear (primarily) univariate models to examine the medium-term trends and uncertainty surrounding expected output growth. Specifically, we look at the "final" and "quasi-real" full sample forecasting performance of the models; that is, we use the most recently released, or "fully revised" real GDP data and consider forecasts using both fixed and fully recursive parameter values. In addition, we investigate the issue of whether (and how) the uncertainty around medium-term output growth has evolved since the mid-1960s.

La planification fiscale à moyen terme est « compliquée » par l’incertitude entourant les prévisions du PIB. Le ralentissement économique à la fin des années 70 et la recrudescence de la croissance à la fin des années 90 démontrent l’impact important qu’un changement non anticipé de la composante tendancielle à sur la planification fiscale. Dans cette étude, nous utilisons des modèles univariés linéaires et non linéaires pour estimer l’incertitude qui entoure nos prévisions du taux de croissance du PIB réel. Plus spécifiquement, on évalue la précision de nos modèles en temps « final » et « quasi-réel »; c’est-à-dire que l’on effectue des prévisions à partir de modèles avec des valeurs de paramètres fixes et pleinement récursifs en utilisant le plus récent échantillon du PIB. De plus, on regarde s’il y a eu changement dans le degré d’incertitude entourant la croissance du PIB depuis les années 60.

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