Joint Prediction Bands for Macroeconomic Risk Management

24 Pages Posted: 12 Jun 2016

See all articles by Q. Farooq Akram

Q. Farooq Akram

Norges Bank - Research Department

Andrew Binning

Norges Bank

Junior Maih

Norges Bank

Date Written: April 28, 2016

Abstract

In this paper we address the issue of assessing and communicating the joint probabilities implied by density forecasts from multivariate time series models. We focus our attention in three areas. First, we investigate a new method of producing fan charts that better communicates the uncertainty present in forecasts from multivariate time series models. Second, we suggest a new measure for assessing the plausibility of non-central point forecasts. And third, we describe how to use the density forecasts from a multivariate time series model to assess the probability of a set of future events occurring. An additional novelty of this paper is our use of a regime-switching DSGE model with an occasionally binding zero lower bound constraint, estimated on US data, to produce the density forecasts. The tools we offer will allow practitioners to better assess and communicate joint forecast probabilities, a criticism that has been leveled at central bank communications.

Keywords: Monetary Policy, Fan charts, DSGE, Zero Lower Bound, Regime-switching, Bayesian Estimation

JEL Classification: C6, C11, C53, E1, E5, E37

Suggested Citation

Akram, Q. Farooq and Binning, Andrew and Maih, Junior, Joint Prediction Bands for Macroeconomic Risk Management (April 28, 2016). Norges Bank Working Paper 07/2016, Available at SSRN: https://ssrn.com/abstract=2793714

Q. Farooq Akram (Contact Author)

Norges Bank - Research Department ( email )

PO Box 1179 Sentrum
N-0107 Oslo
Norway

Andrew Binning

Norges Bank ( email )

P.O. Box 1179
Oslo, N-0107
Norway

Junior Maih

Norges Bank ( email )

P.O. Box 1179
Oslo, N-0107
Norway

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