A pure statistical methodology, based on the copula approach, brings in the benefits of working with marginal distributions instead of multivariate distributions and at the same time capturing the higher moments’ dependence among the macro-financial variables. Such dependence is an important feature to capture in order to adequately characterize the co-dependence among macro-financial variables in the times of stress, as the global financial crisis has shown. Although it can provide superior model forecast performance, this approach is criticized for its inability to offer a “story” and tractability for policy analysis.

The use of judgmental models or expert judgment is often subject to criticism due to arguable structural (economic) inconsistency of the constructed scenarios. However, judgmental models allow analysts the possibility to consider more robust cross-country experience in constructing stress scenarios. In particular, the analysts could make use of the experience of countries that underwent financial crises and use some of the derived crisis shocks, in terms of changes in the macroeconomic variables, to construct stress scenarios for their own country.

As regards the CSEECBs, many utilize the macroeconomic forecasts, provided by their Monetary Policy Divisions, for the baseline macroeconomic scenarios (Albania, Austria, Croatia, the Czech Republic, Greece, Hungary, Poland, Romania, the Slovak Republic, and Slovenia). In the case of Bosnia & Herzegovina and Serbia, the guidelines for the baseline scenario as well as for the adverse scenarios have been provided by the IMF. The Central Banks of Albania and Montenegro judgmentally combine the macroeconomic projections provided by their internal macroeconomic models with those provided by the IMF, both for the baseline and adverse scenarios. The Central Bank of Austria also makes use of the IMF forecasts for Austria and CSEE countries in which Austrian banks have important exposures. The Central Bank of Bulgaria constructs the baseline scenario based on the historical experience and expert judgment.

The adverse scenarios are meant to reflect the country-specific macroeconomic risks and exposures. The Czech, Hungarian, Romanian, and Slovak Central Banks build the adverse scenarios using the same models as for macroeconomic forecast and the monetary policy analysis. For the Czech Republic and the Slovak Republic, the adverse scenarios for the first part of 2010 envisaged the risk of a more protracted W-shaped recession<sup>10</sup> (the ‘Double Dip’ scenario) and the combination of adverse financial market developments and weak economic growth relative to the baseline (the ‘Loss of Confidence’ scenario). For Hungary, the stress scenario is consistent with the EU-wide stress scenarios, and for the year of the financial crisis, it covered an external demand shock, a risk premium shock and a confidence shock. The adverse scenarios for Romania are built by mapping various country-specific adverse shocks (e.g., a sudden increase in the country risk premium due to political factors, a cease of the external financing agreements with the financial institutions, and a drop in external demand) in the semistructural model used also for forecasting purposes. The Polish Central Bank uses two VAR models to construct the adverse scenario. One model focuses on interconnections between financial market variables, while the other covers variables of the real economy.

> 10 In the Czech case this is partly associated with a temporary sharp appreciation of the exchange rate.

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