Binary Conditional Forecasts

31 Pages Posted: 24 Oct 2019

See all articles by Michael W. McCracken

Michael W. McCracken

Federal Reserve Banks - Federal Reserve Bank of St. Louis

Joseph McGillicuddy

Federal Reserve Banks - Federal Reserve Bank of St. Louis

Michael Owyang

Federal Reserve Bank of St. Louis - Research Division

Multiple version iconThere are 2 versions of this paper

Date Written: 2019-10-01

Abstract

While conditional forecasting has become prevalent both in the academic literature and in practice (e.g., bank stress testing, scenario forecasting), its applications typically focus on continuous variables. In this paper, we merge elements from the literature on the construction and implementation of conditional forecasts with the literature on forecasting binary variables. We use the Qual-VAR [Dueker (2005)], whose joint VAR-probit structure allows us to form conditional forecasts of the latent variable which can then be used to form probabilistic forecasts of the binary variable. We apply the model to forecasting recessions in real-time and investigate the role of monetary and oil shocks on the likelihood of two U.S. recessions.

Keywords: Qual-VAR, recession, monetary policy, oil shocks

JEL Classification: C22, C52, C53

Suggested Citation

McCracken, Michael W. and McGillicuddy, Joseph and Owyang, Michael T., Binary Conditional Forecasts (2019-10-01). FRB St. Louis Working Paper No. 2019-29, Available at SSRN: https://ssrn.com/abstract=3474772 or http://dx.doi.org/10.20955/wp.2019.029

Michael W. McCracken (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of St. Louis ( email )

411 Locust St
Saint Louis, MO 63011
United States

Joseph McGillicuddy

Federal Reserve Banks - Federal Reserve Bank of St. Louis

411 Locust St
Saint Louis, MO 63011
United States

Michael T. Owyang

Federal Reserve Bank of St. Louis - Research Division ( email )

411 Locust St
Saint Louis, MO 63011
United States

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