Conditional Forecasts and Scenario Analysis with Vector Autoregressions for Large Cross-Sections

39 Pages Posted: 2 Jun 2014

See all articles by Marta Banbura

Marta Banbura

European Central Bank

Domenico Giannone

Federal Reserve Banks - Federal Reserve Bank of New York; Centre for Economic Policy Research (CEPR)

Michele Lenza

European Central Bank (ECB)

Multiple version iconThere are 2 versions of this paper

Date Written: April 2014

Abstract

This paper describes an algorithm to compute the distribution of conditional forecasts, i.e. projections of a set of variables of interest on future paths of some other variables, in dynamic systems. The algorithm is based on Kalman filtering methods and is computationally viable for large vector autoregressions (VAR) and dynamic factor models (DFM). For a quarterly data set of 26 euro area macroeconomic and financial indicators, we show that both approaches deliver similar forecasts and scenario assessments. In addition, conditional forecasts shed light on the stability of the dynamic relationships in the euro area during the recent episodes of financial turmoil and indicate that only a small number of sources drive the bulk of the fluctuations in the euro area economy.

Keywords: Bayesian Shrinkage, Conditional Forecast, Dynamic Factor Model, Large Cross-Sections, Vector Autoregression

JEL Classification: C11, C13, C33, C53

Suggested Citation

Banbura, Marta and Giannone, Domenico and Lenza, Michele, Conditional Forecasts and Scenario Analysis with Vector Autoregressions for Large Cross-Sections (April 2014). CEPR Discussion Paper No. DP9931. Available at SSRN: https://ssrn.com/abstract=2444954

Marta Banbura (Contact Author)

European Central Bank ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Domenico Giannone

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Michele Lenza

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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