RDP 2022-03: Macrofinancial Stress Testing on Australian Banks 7. Future Work

Development of the stress testing model is ongoing. There are many aspects that are designed to be simple, to maximise the intuition that can be gleaned from scenario analysis. Nevertheless, some aspects of the model's simplicity reflect its stage of development. The Financial Stability Department of the RBA will continue to refine the model over time to ensure its usefulness as an analytical tool improves over time.

There are, nonetheless, two key areas in which the model can most productively be improved. The first is in relation to incorporating uncertainty into the model. Use of the model naturally involves multiple levels of uncertainty: scenario uncertainty, parameter uncertainty and model specification uncertainty. Many of these can plausibly be included in the model, though at the cost of additional complexity. Doing so would allow the modeller to produce results that show a range of forecast outcomes, rather than a single central estimate, which better reflects how model results should be interpreted. The second priority avenue for improvement is in modelling contagion and feedback effects. These features are the key advantage arising from top-down, rather than bottom-up, modelling. Some avenues of contagion are already captured, as discussed in Section 5, but in most cases these are initial attempts that can be improved over time.