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Nonlinear Models for U.K. Macroeconomic Time Series

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  • Öcal Nadir

    (Middle East Technical University)

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    Abstract

    This paper examines possible nonlinearities in growth rates of nine U.K. macroeconomic time series, namely gross domestic product, price, consumption, retail sales, personal disposable income, savings, investment, industrial production and unemployment, chosen as representative of series typically used to investigate business cycle fluctuations. By basing analysis on the class of smooth-transition autoregressive (STAR) models, it is assumed that the economy can be in one of two states with distinct dynamics or in transition between these states. Except for consumption, industrial production, and unemployment, I successfully estimate STAR models that pass a set of mis-specification tests. For the former three variables, the results indicate that two-threshold (three-regime) STAR models may be needed for a better description of their dynamics. The comparison of nonlinear models with their linear counterparts shows that although in most of the cases estimated nonlinear models yield lower residual variances and lower root-mean-square errors (RMSEs) in some cases, there is essentially no evidence of nonlinearity according to Diebold and Mariano's (1995) test of equal forecast accuracy. It is worthy of note that my modeling procedure with and without dummy variables introduced to account for abnormal observations suggests that these observations should not be overlooked within the context of STAR-type nonlinear modeling.

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    Bibliographic Info

    Article provided by De Gruyter in its journal Studies in Nonlinear Dynamics & Econometrics.

    Volume (Year): 4 (2000)
    Issue (Month): 3 (October)
    Pages: 1-15

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    Handle: RePEc:bpj:sndecm:v:4:y:2000:i:3:n:3

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    Cited by:
    1. Shabbir Ahmad & Abdul Rashid, 2008. "Non-linear PPP in South Asia and China," Economics Bulletin, AccessEcon, vol. 6(17), pages 1-6.
    2. Bruno, Giancarlo, 2009. "Non-linear relation between industrial production and business surveys data," MPRA Paper 42337, University Library of Munich, Germany.
    3. Mubariz Hasanov & Aysen Arac & Funda Telatar, 2012. "Nonlinearity and Structural Stability in the Phillips Curve: Evidence from Turkey," Hacettepe University Department of Economics Working Papers 20123, Hacettepe University, Department of Economics.
    4. Donauer, Stefanie & Heinen, Florian & Sibbertsen, Philipp, 2010. "Identification problems in ESTAR models and a new model," Hannover Economic Papers (HEP) dp-444, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.

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