Scenario Synthesis and Macroeconomic Risk

IMF Working Papers, May 30, 2025

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We develop methodology to bridge scenario analysis and risk forecasting, leveraging their respective strengths in policy settings.
The methodology, rooted in Bayesian analysis, addresses the fundamental challenge of reconciling judgmental narrative approaches with statistical forecasting.
The framework systematically evaluates and integrates risks from different scenarios, aiding forecasting in policy institutions while supporting clear and rigorous communication of evolving risks.
The analysis also discusses broader questions of integrating judgmental information with statistical model-based forecasts in the face of as-yet unmodeled circumstances.

Root: Bayesian analysis.
Core tasks addressed:
- Reconciling judgmental narrative approaches with statistical forecasting.
- Evaluating explicit measures of concordance of scenarios with a reference forecasting model.
- Delivering predictive synthesis of the scenarios to best match the reference forecasting model.
- Addressing scenario set incompleteness.

The methodology evaluates explicit measures of concordance of scenarios with a reference forecasting model.
Predictive synthesis is used to combine scenarios to best match the reference model’s forecasts.
The approach provides a structured framework to:
- Systematically evaluate risks across multiple scenarios.
- Integrate scenario-based risks into forecasting and policy analysis.
- Support clear and rigorous communication of evolving risks within policy institutions.

Use cases: forecasting in policy institutions, stress testing, forecast risk assessment.
The framework assists in:
- Integrating judgmental scenario information with model-based statistical forecasts.
- Communicating evolving macroeconomic risks in a rigorous manner.
- Addressing incomplete scenario sets and misalignment between narratives and model forecasts.

Subject: Capital markets, Economic and financial statistics, External sector statistics, Financial markets, Financial sector policy and analysis, Financial sector stability, Macroeconomic risks, Public financial management (PFM), Stress testing
Keywords: Bayesian Predictive Synthesis, Capital markets, Constitution avenue NW, Durham, Entropic Tilting, External sector statistics, Financial sector stability, Forecast Risk Assessment, Global, Judgmental Forecasting, Macroeconomic Forecasting, Macroeconomic risks, Misclassification Rates, Mixtures of Scenarios, nc 27708, NY Fed, risk forecasting, scenario analysis, scenario synthesis, Stress testing