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The Effect of Nonlinearity between Credit Conditions and Economic Activity on Density Forecasts

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  • Michal Franta

Abstract

This paper examines the effect of nonlinearities on density forecasting. It focuses on the relationship between credit markets and the rest of the economy. The possible nonlinearity of this relationship is captured by a threshold vector autoregressive model estimated on US data using Bayesian methods. Density forecasts thus account for the uncertainty in all model parameters and possible future regime changes. It is shown that considering nonlinearity can improve the probabilistic assessment of the economic outlook. Moreover, three illustrative examples are discussed to shed some light on the possible practical applicability of density forecasts derived from non‐linear models. Copyright © 2015 John Wiley & Sons, Ltd.

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  • Michal Franta, 2016. "The Effect of Nonlinearity between Credit Conditions and Economic Activity on Density Forecasts," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 35(2), pages 147-166, March.
    • Handle: RePEc:wly:jforec:v:35:y:2016:i:2:p:147-166
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    7. Pfeifer, Lukáš & Hodula, Martin, 2021. "A profit-to-provisioning approach to setting the countercyclical capital buffer," Economic Systems, Elsevier, vol. 45(1).
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    More about this item

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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