The general aim of the project, which is the joint initiative between the UK and French researchers, is to develop and apply new methods which will be used for the evaluation of uncertainties associated with forecasting of main macroeconomic, mostly monetary, indicators. By uncertainties we understand the probabilities that the macroeconomic characteristics like inflation, interest and exchange rates will reach extreme values, indicating deflation of very high inflation, drastic devaluation or revaluation and radical changes in interest rates. The methodological stimulation of the project has been provided by recent development of a new class of probability distributions, the so-called tempered stable distributions. We propose that the macroeconomic uncertainties should be modelled by these distributions which fit better to data than the traditionally used normal (or related) distributions. Such novel approach enables improving on the degree of accuracy in calculation probabilities of realisation of events like drastic devaluations, occurrences of high inflation or deflation and hitting monetary targets. More specifically, this approach will be applied for constructing forecasts, prediction of turning points and assessing risks related to monetary policies. Regarding forecasting, the emphasis is not on the extrapolation of actual tendencies but rather on deviations from such tendencies. The objectives also shares roots with some financial risk management theories used in finance, especially for modelling of option pricing. However, the methods and techniques will be developed in different direction, by concentrating on changes in parameters over time, mutual dependencies and mixing different types of distributions.Specific objectives of the project concern the development and application of new methods which use the tempered stable distributions in:
Static analysis (Objective 1): The assumption here is that the uncertainties are not changing over time. Works will initially concentrate on the methodological problems of the quantification of uncertainty, progressing to the analysis of characteristics of such uncertainties and developing new methods of estimation and hypothesis testing. The empirical part will consist of the analysis of such uncertainties in world inflation and exchange rates between major currencies.
Dynamic analysis (Objective 2): Within this objective we analyse the ex-post time dependencies in dynamic models constructed on the basis of the methods researched within Objective 1. More specifically the approach of analysis of univariate time series under the assumption of time dependence and incorporating distributions of uncertainties will be proposed here and applied to modelling inflationary, interest and exchange rates processes.
Multivariate analysis (Objective 3): Here we generalise the methods developed within Objective 1 in such a way that they could be used for the analysis of uncertainties jointly for a number of periods. These methods will be applied for constructing methodologically innovative probabilistic forecasts of inflation in OECD countries, deviations from target (or equilibrium) interest rates and forecasting of turning points and continuations of tendencies in macroeconomic development. The project will lead to publications of papers in academic journals, development of software which could be used for teaching and further research and delivering fully elaborated methods and computational algorithms to end users (banks and government bodies).
Project ID: ANR-10-ORAR-0008
Monsieur CHRISTIAN FRANCQ (CNRS-DR PARIS A)
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