Quantifying the uncertainty of long-term macroeconomic projections

Abstract

We propose a practical approach to measuring the uncertainty of long-term economic projections. The presented method quantifies the uncertainty of economic variables by using simulations from a multivariate unobserved components model in which variables are formulated as sums of stationary and nonstationary components. The method captures the correlations between both the stationary and nonstationary components of the variables and offers a seamless analysis of short- and long-term uncertainty. Experiments on artificial data demonstrate that, despite its simplicity, the method performs fairly well compared with alternative methods in terms of long-term predictive accuracy and coverage.