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Some Methods for Assessing the Need for Non-linear Models in Business Cycle Analysis and Forecasting

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Abstract

There is a long tradition in business cycle analysis of arguing that non-linear models are needed to explain the business cycle. In recent years many non-linear models have been fitted to data on GDP for many countries, but particularly for the U.S. In this paper we set our criteria to evaluate the success of non-linear models in explaining the cycle and then evaluate three recent models in the light of these criteria. We find that the models are capable of explaining the "shape" of expansions, something linear models cannot do, but do so at the cost of making expansions longer than they should be and in producing transition probabilities to recessions that are too low.

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  • A. Pagan & J. Engel & D. Haugh, 2004. "Some Methods for Assessing the Need for Non-linear Models in Business Cycle Analysis and Forecasting," Econometric Society 2004 Australasian Meetings 284, Econometric Society.
    • Handle: RePEc:ecm:ausm04:284
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    1. Harding, Don & Pagan, Adrian, 2002. "Dissecting the cycle: a methodological investigation," Journal of Monetary Economics, Elsevier, vol. 49(2), pages 365-381, March.
    2. Zacharias Psaradakis & Martin Sola, 2003. "On detrending and cyclical asymmetry," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 18(3), pages 271-289.
    3. Diebold, Francis X & Rudebusch, Glenn D, 1990. "A Nonparametric Investigation of Duration Dependence in the American Business Cycle," Journal of Political Economy, University of Chicago Press, vol. 98(3), pages 596-616, June.
    4. Durland, J Michael & McCurdy, Thomas H, 1994. "Duration-Dependent Transitions in a Markov Model of U.S. GNP Growth," Journal of Business & Economic Statistics, American Statistical Association, vol. 12(3), pages 279-288, July.
    5. Gerhard Bry & Charlotte Boschan, 1971. "Cyclical Analysis of Time Series: Selected Procedures and Computer Programs," NBER Books, National Bureau of Economic Research, Inc, number bry_71-1.
    6. Arthur F. Burns & Wesley C. Mitchell, 1946. "Measuring Business Cycles," NBER Books, National Bureau of Economic Research, Inc, number burn46-1.
    7. Adrian Pagan, 1997. "Towards an Understanding of Some Business Cycle Characteristics," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 30(1), pages 1-15, March.
    8. Gerhard Bry & Charlotte Boschan, 1971. "Foreword to "Cyclical Analysis of Time Series: Selected Procedures and Computer Programs"," NBER Chapters, in: Cyclical Analysis of Time Series: Selected Procedures and Computer Programs, pages -1, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Fok, Dennis & van Dijk, Dick & Franses, Philip Hans, 2005. "Forecasting aggregates using panels of nonlinear time series," International Journal of Forecasting, Elsevier, vol. 21(4), pages 785-794.
    2. Frédérick Demers & Ryan Macdonald, 2007. "The Canadian Business Cycle: A Comparison of Models," Staff Working Papers 07-38, Bank of Canada.

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    More about this item

    Keywords

    business cyles; non-linear models;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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