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

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  • Granger Clive W.J.

    () (University of California, San Diego)

Abstract

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.

Suggested Citation

  • Granger Clive W.J., 2008. "Non-Linear Models: Where Do We Go Next - Time Varying Parameter Models?," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 12(3), pages 1-11, September.
  • Handle: RePEc:bpj:sndecm:v:12:y:2008:i:3:n:1
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    References listed on IDEAS

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    1. Granger, Clive W. J. & Swanson, Norman R., 1997. "An introduction to stochastic unit-root processes," Journal of Econometrics, Elsevier, vol. 80(1), pages 35-62, September.
    2. Garratt, Anthony & Lee, Kevin & Pesaran, M. Hashem & Shin, Yongcheol, 2012. "Global and National Macroeconometric Modelling: A Long-Run Structural Approach," OUP Catalogue, Oxford University Press, number 9780199650460.
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