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Was the Recent Downturn in US GDP Predictable?

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Author Info

  • Mehmet Balcilar

    ()
    (Department of Economics, Eastern Mediterranean University, Famagusta, North Cyprus,via Mersin 10, Turkey)

  • Rangan Gupta

    ()
    (Department of Economics, University of Pretoria)

  • Anandamayee Majumdar

    ()
    (Department of Biostatistics, University of North Texas Health Science Center, School of Public Health, Fort Worth, Texas, 76107, USA)

  • Stephen M. Miller

    ()
    (College of Business, University of Las Vegas, Nevada)

Abstract

This paper uses small set of variables-- real GDP, the inflation rate, and the short-term interest rate -- and a rich set of models -- athoeretical and theoretical, linear and nonlinear, as well as classical and Bayesian models -- to consider whether we could have predicted the recent downturn of the US real GDP. Comparing the performance by root mean squared errors of the models to the benchmark random-walk model, the two theoretical models, especially the nonlinear model, perform well on the average across all forecast horizons in out-of-sample forecasts, although at specific forecast horizons certain nonlinear athoeretical models perform the best. The nonlinear theoretical model also dominates in our ex ante forecast of the Great Recession, suggesting that developing forward-looking, microfounded, nonlinear, dynamic-stochastic-general-equilibrium models of the economy, may prove crucial in forecasting turning points.

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Bibliographic Info

Paper provided by University of Pretoria, Department of Economics in its series Working Papers with number 201230.

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Length: 47 pages
Date of creation: Oct 2012
Date of revision:
Handle: RePEc:pre:wpaper:201230

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Keywords: Forecasting; Linear and non-linear models;

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