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Estimating Event Probabilities from Macroeconomic Models Using Stochastic Simulation

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  • Ray C. Fair

Abstract

This paper shows how probability questions can be answered within the context of macroeconometric models by using stochastic simulation. One can estimate, for example, the probability of a recession occurring within some fixed period in the future. Probability estimates are presented for two recessionary events and one inflationary event. An advantage of the present procedure is that the probabilities estimated from the stochastic simulation are objective in the sense that they are based on the use of estimated distributions. They are consistent with the probability structure of the model. This paper also shows that estimated probabilities can be used in the evaluation of a model, and an example of this type of evaluation is presented.

Suggested Citation

  • Ray C. Fair, 1991. "Estimating Event Probabilities from Macroeconomic Models Using Stochastic Simulation," NBER Technical Working Papers 0111, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberte:0111
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    1. Fair, Ray C, 1980. "Estimating the Expected Predictive Accuracy of Econometric Models," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 21(2), pages 355-378, June.
    2. Diebold, Francis X & Rudebusch, Glenn D, 1989. "Scoring the Leading Indicators," The Journal of Business, University of Chicago Press, vol. 62(3), pages 369-391, July.
    3. James H. Stock & Mark W. Watson, 1989. "New Indexes of Coincident and Leading Economic Indicators," NBER Chapters, in: NBER Macroeconomics Annual 1989, Volume 4, pages 351-409, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Garrat, A. & Lee, K. & Pesaran, M.H. & Shin, Y., 2000. "Forecast Uncertainties in Macroeconometric Modelling: An Application to the UK Economy," Cambridge Working Papers in Economics 0004, Faculty of Economics, University of Cambridge.
    2. Lopez, Jose A, 2001. "Evaluating the Predictive Accuracy of Volatility Models," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 20(2), pages 87-109, March.
    3. Mark W. Watson, 1991. "Using econometric models to predict recessions," Economic Perspectives, Federal Reserve Bank of Chicago, vol. 15(Nov), pages 14-25.

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