September 23, 2008
Investigating uncertainty in macroeconomic forecasts by stochastic simulation
We investigate four sources of uncertainty with CPB’s macroeconomic model SAFFIER: provisional data, exogenous variables, model parameters and residuals of behavioural equations.
Uncertainty is an inherent attribute of any forecast. We apply a Monte Carlo simulation technique to calculate standard errors for the short-term and medium-term horizon for GDP and eight other macroeconomic variables. The results demonstrate that the main contribution to the total variance of a medium-term forecast emanates from the uncertainty in the exogenous variables. For the short-term forecast both exogenous variables and provisional data are most relevant.
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