Title: Scenario forecasting with the conditional probit
Authors: Michael Owyang - Federal Reserve Bank of St Louis (United States) [presenting]
Abstract: Elements from the literature on forecasting binary variables are merged with the literature on the construction and implementation of conditional forecasts. We do so by building on the Qual-VAR model. This model is a standard VAR but augmented with a continuous latent variable that, in turn, can be used to make probablitistic forecasts of a binary outcome as one would with a probit. The joint VAR-probit structure allows us to form counterfactual 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 counterfactual monetary policy interventions on the likelihood of recessions.