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The GVAR HandbookStructure and Applications of a Macro Model of the Global Economy for Policy Analysis$
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Filippo di Mauro and M. Hashem Pesaran

Print publication date: 2013

Print ISBN-13: 9780199670086

Published to Oxford Scholarship Online: May 2013

DOI: 10.1093/acprof:oso/9780199670086.001.0001

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Using global VAR models for scenario-based forecasting and policy analysis

Using global VAR models for scenario-based forecasting and policy analysis

Chapter:
(p.97) 7 Using global VAR models for scenario-based forecasting and policy analysis
Source:
The GVAR Handbook
Author(s):

Greenwood-Nimmo Matthew

Nguyen Viet Hoang

Shin Yongcheol

Publisher:
Oxford University Press
DOI:10.1093/acprof:oso/9780199670086.003.0007

This chapter demonstrates the usefulness of the GVAR modelling framework as a tool for scenario-based forecasting and counterfactual analysis. Working with the GVAR model developed by Greenwood-Nimmo, Nguyen and Shin (2010, J. Appl. Econometrics), we first show how probabilistic forecasting can be applied to the analysis of global imbalances. Probabilistic forecasting involves evaluating the conditional probability that a given event or combination of events will occur over a defined horizon by means of model-based simulations. To illustrate the usefulness of this approach, we develop a simple four-way probabilistic classificatory system built around the notions of balancing improvement in the trade balance, unbalancing improvement, balancing deterioration and unbalancing deterioration. We then extend a similar approach in a counterfactual context by constructing a range of scenarios as linear combinations of generalised impulse responses. We conclude that GVAR models are particularly well-suited to scenario-based analyses such as ours as they have the potential to analyse singularly rich datasets that allow the modeller to construct a wide range of policy-relevant scenarios.

Keywords:   global VAR, scenario-based forecasting and analysis, global imbalances

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