Probabilistic approach to assessing macroeconomic uncertainties
- Start date: 01 January 2011
- End date: 14 October 2014
The project aims at developing new methods of forecasting of macroeconomic indicators, like inflation, interest rates and output, where extreme events (hyperinflations, rapid devaluations, etc) are not treated as anomalies, but as intrinsic parts of economic processes.
The common practice in the pre-crisis period was to assume that the economy was developing without much turbulence, where such extreme events were infrequent enough to be regarded as rare shocks. The essence of the methods which are to be developed within the project is in applying novel theoretical distributions for explaining macroeconomic uncertainties, where the drastic events are treated as intrinsic characteristics of these distributions. This new class of distributions (often called the tempered stable distributions) allows for flexible modelling of various types of extreme scenarios, asymmetries and odd events.
There are three groups of tasks here. The first group aims at developing technical procedures for the analysis of such tempered stable distributions which are particularly well suited for describing macroeconomic uncertainties. The second group deals with the analysis of time series of data of macroeconomic indicators with the use of tempered stable distributions. Within the third group of tasks new ways of forecasting uncertainties for long horizons will be investigated.