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Assessing Macroeconomic Forecast Uncertainty: An Application to the Risk of Deflation in Germany
Borbély, Dora | Meier, Carsten-Patrick
Credit and Capital Markets – Kredit und Kapital, Vol. 38 (2005), Iss. 3 : pp. 377–399
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Dora Borbely, Kiel
Carsten-Patrick Meier, Kiel
References
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Abstract
This paper proposes an approach for estimating the uncertainty associated with model-based macroeconomic forecasts. We argue that estimated forecast intervals should account for the uncertainty arising from selecting the specification of an empirical forecasting model from the sample data. To allow this uncertainty to be considered systematically, we formalize a model selection procedure that specifies the lag structure of a model and accounts for aberrant observations. The procedure can be used to bootstrap the complete model selection process when estimating forecast intervals. We apply the procedure to generating forecasts and forecast intervals for the change in the consumer price index in Germany, with special emphasis on assessing the risk of deflationary developments. (JEL C5, E0, E5)