Incorporating Uncertainties into Economic Forecasts: An Application to Forecasting Economic Activity in Croatia

22 Pages Posted: 15 Apr 2015

See all articles by Dario Rukelj

Dario Rukelj

Republic of Croatia - Ministry of Finance - Croatia

Barbara Ulloa

Central Bank of Chile

Date Written: February 5, 2011

Abstract

In this paper we present a framework for incorporating uncertainties into economic activity forecasts for Croatia. Using the vector error correction model (VECM) proposed by Rukelj (2010) as the benchmark model, we forecast densities of the variable of interest using stochastic simulations for incorporating future and parameter uncertainty. We exploit the use of parametric and non-parametric approaches in generating random shocks as in Garrat et al. (2003). Finally we evaluate the results by the Kolmogorov-Smirnov and Anderson-Darling test of probability integral transforms. The main findings are: (1) the parametric and the non-parametric approach yield similar results; (2) the incorporation of parameter uncertainty results in much wider probability forecast; and (3) evaluation of density forecasts indicates better performance when only future uncertainties are considered and parameter uncertainties are excluded.

Keywords: Economic Forecasting, Density Forecasting, Fan Chart, Stochastic Simulations, Uncertainty, Croatia

JEL Classification: E37

Suggested Citation

Rukelj, Dario and Ulloa, Barbara, Incorporating Uncertainties into Economic Forecasts: An Application to Forecasting Economic Activity in Croatia (February 5, 2011). Available at SSRN: https://ssrn.com/abstract=2594293 or http://dx.doi.org/10.2139/ssrn.2594293

Dario Rukelj

Republic of Croatia - Ministry of Finance - Croatia ( email )

Katančićeva 5
Zagreb, 10 000
Croatia

Barbara Ulloa (Contact Author)

Central Bank of Chile ( email )

Agustinas 1180
Santiago, 8340454
Chile

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