DP15867 Can Machine Learning Catch the COVID-19 Recession?

Author(s): Philippe Goulet Coulombe, Massimiliano Marcellino, Dalibor Stevanovic
Publication Date: March 2021
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JEL(s):
Programme Areas: Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15867

Based on evidence gathered from a newly built large macroeconomic data set for the UK, labeled UK-MD and comparable to similar datasets for the US and Canada, it seems the most promising avenue for forecasting during the pandemic is to allow for general forms of nonlinearity by using machine learning (ML) methods. But not all nonlinear ML methods are alike. For instance, some do not allow to extrapolate (like regular trees and forests) and some do (when complemented with linear dynamic components). This and other crucial aspects of ML-based forecasting in unprecedented times are studied in an extensive pseudo-out-of-sample exercise.