Model-Based Globally-Consistent Risk Assessment

IMF Working Papers, May 22, 2020

Source details

Title: Model-Based Globally-Consistent Risk Assessment
Authors: Michal Andrle, Benjamin L Hunt
Date: May 22, 2020
Format: IMF Working Papers
Summary: This paper outlines an approach to assess uncertainty around a forecast baseline as well as the impact of alternative policy rules on macro variability. The approach allows for non-Gaussian shock distributions and non-linear underlying macroeconomic models. Consequently, the resulting distributions for macroeconomic variables can exhibit skewness and fat tails. Several applications are presented that illustrate the practical implementation of the technique including confidence bands around a baseline forecast, the probabilities of global growth falling below a specified threshold, and the impact of alternative fiscal policy reactions functions on macro variability.

Allows non-Gaussian shock distributions.
Accommodates non-linear underlying macroeconomic models.
Resulting predictive distributions can exhibit:
- Skewness
- Fat tails
Relevant technical constructs and terms preserved from the source:
- distribution, distribution change, distribution of shock, DSGE model, DSGE models, predictive density, predictive distribution, shock distribution, skew, non-Gaussian, nonlinear, normal distribution

Practical implementations illustrated in the paper include:
- Confidence bands around a baseline forecast.
- Probabilities of global growth falling below a specified threshold.
- Impact of alternative fiscal policy reaction functions on macro variability.
Subjects addressed:
- Financial services
- Fiscal policy
- Interest rate floor
- Monetary policy
- Production
- Production growth
- Zero lower bound

The approach enables policymakers and analysts to:
- Evaluate uncertainty around macroeconomic forecast baselines when shocks are non-Gaussian and model relationships are non-linear.
- Quantify tail risks and asymmetric outcomes (skewness and fat tails) in macro variables.
- Assess how alternative fiscal policy reaction functions affect macro variability and risk profiles.
Keywords indicating policy-relevant emphasis:
- economic policy, fiscal policy rule, monetary policy, risk assessment, output distribution, output growth distribution, growth distribution, headline inflation, Interest rate floor, Zero lower bound

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Source: IMF Working Paper "Model-Based Globally-Consistent Risk Assessment" by Michal Andrle and Benjamin L Hunt, May 22, 2020.