Forecast Uncertainties in Macroeconometric Modelling: An Application to the UK Economy

Abstract

This paper argues that probability forecasts convey information on the uncertainties that surround macroeconomic forecasts in a manner which is straightforward and which is preferable to other alternatives, including the use of confidence intervals. Probability forecasts relating to UK output growth and inflation, obtained using a small macroeconometric model, are presented. We discuss in detail the probability that inflation will fall within the Bank of England?s target range and that recession will be avoided, both as separate single events and jointly. The probability forecasts are also used to provide insights on the interrelatedness of output growth and inflation outcomes at different horizons.

Keywords: Probability forecasting, long run structural VARs, macroeconome-tric modelling, probability forecasts of inflation, interest rates, output growth

JEL Classification: C32, C53, E17