NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Estimating Event Probabilities from Macroeconomic Models Using Stochastic Simulation

Ray C. Fair

NBER Technical Working Paper No. 111
Issued in August 1991
NBER Program(s):   EFG

This paper shows how probability questions can be answered within the context of macroeconometric models by using stochastic simulation. One can estimate, for example, the probability of a recession occurring within some fixed period in the future. Probability estimates are presented for two recessionary events and one inflationary event. An advantage of the present procedure is that the probabilities estimated from the stochastic simulation are objective in the sense that they are based on the use of estimated distributions. They are consistent with the probability structure of the model. This paper also shows that estimated probabilities can be used in the evaluation of a model, and an example of this type of evaluation is presented.

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