Using Global VAR Models for Scenario-Based Forecasting and Policy Analysis

The GVAR Handbook: Structure and Applications of a Macro Model of the Global Economy for Policy Analysis (F. di Mauro and M.H. Pesaran eds.), Forthcoming.

14 Pages Posted: 23 Mar 2012 Last revised: 14 Jul 2012

See all articles by Matthew Greenwood-Nimmo

Matthew Greenwood-Nimmo

University of Melbourne; Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA)

Viet Hoang Nguyen

University of Melbourne - Melbourne Institute: Applied Economic & Social Research

Yongcheol Shin

Independent

Date Written: April 16, 2012

Abstract

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 classi ficatory 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

JEL Classification: C32, C53, E17

Suggested Citation

Greenwood-Nimmo, Matthew and Nguyen, Viet Hoang and Shin, Yongcheol, Using Global VAR Models for Scenario-Based Forecasting and Policy Analysis (April 16, 2012). The GVAR Handbook: Structure and Applications of a Macro Model of the Global Economy for Policy Analysis (F. di Mauro and M.H. Pesaran eds.), Forthcoming., Available at SSRN: https://ssrn.com/abstract=2026984 or http://dx.doi.org/10.2139/ssrn.2026984

Matthew Greenwood-Nimmo (Contact Author)

University of Melbourne ( email )

185 Pelham Street
Carlton, Victoria 3053
Australia

Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA) ( email )

ANU College of Business and Economics
Canberra, Australian Capital Territory 0200
Australia

Viet Hoang Nguyen

University of Melbourne - Melbourne Institute: Applied Economic & Social Research ( email )

Level 5, FBE Building, 111 Barry Street
Parkville, Victoria 3010
Australia

Yongcheol Shin

Independent

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