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Forecasting macro variables with a Qual VAR business cycle turning point index

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  • Michael J. Dueker
  • Katrin Wesche

Abstract

One criticism of VAR forecasting is that macroeconomic variables tend not to behave as linear functions of their own past around business cycle turning points. This article investigates the methods and efficacy of forecasting with a VAR that expands the information set to include dynamic forecasts of a qualititative variable - business cycle turning points. We apply this Qual VAR model to five of the G7 economies and find that the Qual VAR improves on forecasts from standard models, both for the qualitative variable and for macroeconomic data, such as industrial production. The improvement in the forecasts of the qualitative variable, relative to the standard probit model, is especially pronounced in recessionary periods. ; (earlier title: Forecasting output with information from business cycle turning points: a qualitative variable VAR)

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Bibliographic Info

Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2001-019.

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Date of creation: 2005
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Handle: RePEc:fip:fedlwp:2001-019

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Keywords: Business cycles ; Forecasting ; Vector autoregression;

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References

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  1. Arturo Estrella & Frederic S. Mishkin, 1998. "Predicting U.S. Recessions: Financial Variables As Leading Indicators," The Review of Economics and Statistics, MIT Press, vol. 80(1), pages 45-61, February.
  2. Michael J. Dueker, 2003. "Dynamic forecasts of qualitative variables: a Qual VAR model of U.S. recessions," Working Papers 2001-012, Federal Reserve Bank of St. Louis.
  3. Chris R. Birchenhall & Marianne Sensier & Denise R. Osborn, 2000. "Predicting Uk Business Cycle Regimes," Computing in Economics and Finance 2000 134, Society for Computational Economics.
  4. Eichengreen, Barry & Watson, Mark W & Grossman, Richard S, 1985. "Bank Rate Policy under the Interwar Gold Standard: A Dynamic Probit Model," Economic Journal, Royal Economic Society, vol. 95(379), pages 725-45, September.
  5. Bernard, Henri J & Gerlach, Stefan, 1998. "Does the Term Structure Predict Recessions? The International Evidence," CEPR Discussion Papers 1892, C.E.P.R. Discussion Papers.
  6. Davis, E Philip & Fagan, Gabriel, 1997. "Are Financial Spreads Useful Indicators of Future Inflation and Output Growth in EU Countries?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 12(6), pages 701-14, Nov.-Dec..
  7. Chib, Siddhartha, 1993. "Bayes regression with autoregressive errors : A Gibbs sampling approach," Journal of Econometrics, Elsevier, vol. 58(3), pages 275-294, August.
  8. Estrella, Arturo & Mishkin, Frederic S., 1997. "The predictive power of the term structure of interest rates in Europe and the United States: Implications for the European Central Bank," European Economic Review, Elsevier, vol. 41(7), pages 1375-1401, July.
  9. Michael Dueker, 1998. "Conditional heteroskedasticity in qualitative response models of time series: a Gibbs sampling approach to the bank prime rate," Working Papers 1998-011, Federal Reserve Bank of St. Louis.
  10. Arturo Estrella & Anthony P. Rodrigues & Sebastian Schich, 2003. "How Stable is the Predictive Power of the Yield Curve? Evidence from Germany and the United States," The Review of Economics and Statistics, MIT Press, vol. 85(3), pages 629-644, August.
  11. Filardo, Andrew J, 1994. "Business-Cycle Phases and Their Transitional Dynamics," Journal of Business & Economic Statistics, American Statistical Association, vol. 12(3), pages 299-308, July.
  12. Norbert Funke, 1997. "Predicting recessions: Some evidence for Germany," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 133(1), pages 90-102, March.
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Cited by:
  1. Makram El-Shagi & Gregor von Schweinitz, 2012. "Qual VAR Revisited: Good Forecast, Bad Story," IWH Discussion Papers 12, Halle Institute for Economic Research.
  2. Adrian Pagan & Don Harding, 2011. "Econometric Analysis and Prediction of Recurrent Events," CREATES Research Papers 2011-33, School of Economics and Management, University of Aarhus.
  3. Rachidi Kotchoni & Dalibor Stevanovic, 2013. "Probability and Severity of Recessions," Cahiers de recherche 1341, CIRPEE.
  4. Annette Meinusch & Peter Tillmann, 2014. "The Macroeconomic Impact of Unconventional Monetary Policy Shocks," MAGKS Papers on Economics 201426, Philipps-Universit├Ąt Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).

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