Scenario building techniques

We have developed the "delta method" as an easy way to build policy-relevant scenarios.

The delta method is a simple technique to construct a macrofinancial scenario (e.g.~a stress scenario or a policy scenario) on top of a baseline scenario. Most commonly, the baseline scenario is obtained by conditioning on a baseline macroeconomic forecast. We then add additional assumptions (unexpected decline of foreign demand, sudden exchange rate depreciation, or rapid worsening of credit performance for idiosyncratic reasons, etc.). After applying the delta method, we obtain the paths of variables in the real and financial sectors that are based on the baseline scenario but deviate consistently with the additional assumptions.