Working Paper: CEPR ID: DP12579
Authors: Juan Antolindiaz; Ivan Petrella; Juan Francisco Rubioramrez
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
JEL Codes: C32; C53; E47
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| unanticipated monetary policy shocks (E39) | federal funds rate (E52) |
| unanticipated monetary policy shocks (E39) | output (C67) |
| unanticipated monetary policy shocks (E39) | inflation (E31) |
| unanticipated monetary policy shocks (E39) | consumption (E21) |
| unanticipated monetary policy shocks (E39) | investment (G31) |
| unanticipated monetary policy shocks (E39) | hours (C41) |
| unanticipated monetary policy shocks (E39) | wages (J31) |
| anticipated monetary policy shocks (E60) | federal funds rate (E52) |
| anticipated monetary policy shocks (E60) | output (C67) |
| anticipated monetary policy shocks (E60) | inflation (E31) |
| anticipated monetary policy shocks (E60) | surprise variable (C29) |