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Non-Linear Models: Where Do We Go Next - Time Varying Parameter Models?

  • Granger Clive W.J.

    ()

    (University of California, San Diego)

Although linear models have been the central focus of econometrics for most of the twentieth century, great developments in non-linear models took place from the latter part of the century. This paper questions the future development of non-linear models in economics and shows (via White's Theorem) that any non-linear model can be approximated by a time-varying parameter linear model. Compared with non-linear models, multi-step forecasts are more easily prepared using time-varying parameter models, while they are also more readily interpretable and theoretical results on aggregation are straightforward to obtain. Nevertheless, there is some evidence that subtle non-linearities may exist in macroeconomic time series.

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

Volume (Year): 12 (2008)
Issue (Month): 3 (September)
Pages: 1-11

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Handle: RePEc:bpj:sndecm:v:12:y:2008:i:3:n:1
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