Structural Scenario Analysis with Svars

74 Pages Posted: 16 Jan 2018 Last revised: 2 Mar 2020

See all articles by Juan Antolin-Diaz

Juan Antolin-Diaz

Fulcrum Asset Management

Ivan Petrella

University of Warwick; Centre for Economic Policy Research (CEPR)

Juan Rubio Ramírez

Emory University

Date Written: January 2018

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: Bayesian methods, Conditional forecasts, forward guidance, Stress Testing, SVARs

JEL Classification: C32, C53, E47

Suggested Citation

Antolin-Diaz, Juan and Petrella, Ivan and Rubio Ramírez, Juan, Structural Scenario Analysis with Svars (January 2018). CEPR Discussion Paper No. DP12579, Available at SSRN: https://ssrn.com/abstract=3102194

Juan Antolin-Diaz (Contact Author)

Fulcrum Asset Management ( email )

5-7 Chester eld Gardens
London, W1J 5BQ
United Kingdom

Ivan Petrella

University of Warwick ( email )

Gibbet Hill Rd.
Coventry, West Midlands CV4 8UW
United Kingdom

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Juan Rubio Ramírez

Emory University ( email )

201 Dowman Drive
Atlanta, GA 30322
United States

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