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Incorporating vintage differences and forecasts into Markov switching models

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  • Jeremy J. Nalewaik
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    Abstract

    This paper discusses extensions of standard Markov switching models that allow estimated probabilities to reflect parameter breaks at or close to the end of the sample, too close for standard maximum likelihood techniques to produce precise parameter estimates. The basic technique is a supplementary estimation procedure, bringing additional information to bear to estimate the statistical properties of the end-of-sample observations that behave differently from the rest. Empirical results using real-time data show that these techniques improve the ability of a Markov switching model based on GDP and GDI to recognize the start of the 2001 recession.

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    File URL: http://www.federalreserve.gov/pubs/feds/2007/200723/200723abs.html
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    Bibliographic Info

    Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2007-23.

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    Date of creation: 2007
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    Handle: RePEc:fip:fedgfe:2007-23

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    Related research

    Keywords: Econometric models;

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    Cited by:
    1. Dennis J. Fixler & Jeremy J. Nalewaik, 2007. "News, noise, and estimates of the "true" unobserved state of the economy," Finance and Economics Discussion Series 2007-34, Board of Governors of the Federal Reserve System (U.S.).
    2. Jeremy J. Nalewaik, 2008. "Lack of signal error (LoSE) and implications for OLS regression: measurement error for macro data," Finance and Economics Discussion Series 2008-15, Board of Governors of the Federal Reserve System (U.S.).
    3. Nalewaik, Jeremy J., 2011. "Incorporating vintage differences and forecasts into Markov switching models," International Journal of Forecasting, Elsevier, vol. 27(2), pages 281-307, April.

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