On Evaluating the Importance of Non-Linearity in Large Macroeconometric Models

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On Evaluating the Importance of Non-Linearity in Large Macroeconometric Models

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Fisher, Paul
Salmon, Mark

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Mark Salmon

Abstract

Most model builders continue to treat their models as deterministic when forecasting, despite the fact that these models are composed of equations which are stochastic in nature. Deterministic solution methods ignore the stochastic information on the model structure and in addition produce biased forecasts in non-linear models. It is therefore important to investigate whether a given model is significantly non-linear. After commenting on the poor simulation methodology employed in a number of earlier studies, we find significant non-linear effects in two large macro models of the United Kingdom economy. This is confirmed by two tests that we propose for assessing the importance of non-linearity in such models.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 86.

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Date of creation: Dec 1985
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Handle: RePEc:cpr:ceprdp:86

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Article
- Fisher, Paul & Salmon, Mark, 1986. "On Evaluating the Importance of Nonlinearity in Large Macroeconometric Models," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 27(3), pages 625-46, October. [Downloadable!] (restricted)

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Jaime Marquez & Neil R. Ericsson, 1990. "Evaluating the predictive performance of trade-account models," International Finance Discussion Papers 377, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
Dag Kolsrud, 2008. "Stochastic Ceteris Paribus Simulations," Computational Economics, Springer, vol. 31(1), pages 21-43, February. [Downloadable!] (restricted)
Giampiero Gallo, 1991. "Forecast Error Decomposition in a Nonlinear Model with Provisional Data," Annales d'Economie et de Statistique, ADRES, issue 22, pages 05, Avril-Jui. [Downloadable!]
Gajda, Jan B. & Markowski, Aleksander, 1998. "Model Evaluation Using Stochastic Simulations: The Case of the Econometric Model KOSMOS," Working Paper 61, National Institute of Economic Research. [Downloadable!]

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