This slide deck describes how CBO used a Markov-switching model to assess the uncertainty of the economic forecast presented in CBO’s Current View of the Economy in 2023 and 2024 and the Budgetary Implications (November 2022).
CBO's analysis of economic uncertainty was conducted in three main steps:
- Preliminary economic projections provided central estimates for each variable;
- 100 simulations of the rates of unemployment, inflation, and interest were jointly estimated around the central estimates, reflecting asymmetric dynamics and relating the variables through an expectations-augmented Phillips curve and an inertial Taylor rule; and
- Forecasts conditional on those rates were estimated using symmetric distributions in which economic output and other variables were synchronized with the simulations of unemployment, inflation, and interest rates.
This document focuses on the second step, which used CBO’s expanded Markov-switching model.