Discussion paper

DP9313 Macroeconomic forecasting during the Great Recession: The return of non-linearity?

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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Citation

Marcellino, M, L Ferrara and M Mogliani (eds) (2013), “DP9313 Macroeconomic forecasting during the Great Recession: The return of non-linearity?”, CEPR Press Discussion Paper No. 9313. https://cepr.org/publications/dp9313