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Title: Macroeconomic forecasting during the Great Recession: The return of non-linearity?

Author(s): Laurent Ferrara, Massimiliano Marcellino and Matteo Mogliani

Publication Date: January 2013

Keyword(s): Great Recession, Macroeconomic forecasting and Non-linear models

Programme Area(s): International Macroeconomics

Abstract: The debate on the forecasting ability of non-linear models has a long history, and the Great Recession episode provides us with an interesting opportunity for a reassessment of the forecasting performance of several classes of non-linear models. We conduct an extensive analysis over a large quarterly database consisting of major macroeconomic variables for a large panel of countries. It turns out that, on average, non-linear models cannot outperform standard linear specifications, even during the Great Recession. However, non-linear models lead to an improvement of the predictive accuracy in almost 40% of cases, and interesting specific patterns emerge among models, variables and countries. These results suggest that this specific episode seems to be characterized by a sequence of shocks with unusual large magnitude, rather than by an increase in the degree of non-linearity of the stochastic processes underlying the main macroeconomic time series.

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Bibliographic Reference

Ferrara, L, Marcellino, M and Mogliani, M. 2013. 'Macroeconomic forecasting during the Great Recession: The return of non-linearity?'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=9313