A structural Bayesian VAR for model-based fan charts

Abstract

Inflation forecast uncertainty is of importance for a wide range of agents in the economy, central banks in particular. Ways to describe and account for this uncertainty in a consistent manner have received increasing attention of late, in part due to the growing number of inflation-targeting central banks. This paper develops a large structural VAR for the Swedish economy and estimates it in a Bayesian framework. The methodology permits not only structural interpretation and analysis but offers a natural way to formalise forecast uncertainty, as the posterior predictive density from the model has the interpretation of a fan chart.