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The European Way Out of Recessions

  • Frédérique Bec

    ()

    (THEMA, Universite de Cergy-Pontoise)

  • Othman Bouabdallah

    (Banque de France, DGEI-DCPM)

  • Laurent Ferrara

    (Banque de france, DGEI-DERIE-SEMSI)

This paper proposes a two-regime Bounce-Back Function augmented Self-Exciting Threshold AutoRegression (SETAR) which allows for various shapes of recoveries from the recession regime. It relies on the bounce-back effects first analyzed in a Markov-Switching setup by Kim, Morley and Piger [2005] and recently extended by Bec, Bouabdallah and Ferrara [2011a]. This approach is then applied to post-1973 quarterly growth rates of French, German, Italian, Spanish and Euro area real GDPs. Both the linear autoregression and the standard SETAR without bounce-back effect null hypotheses are strongly rejected against the Bounce-Back augmented SETAR alternative in all cases but Italy. The relevance of our proposed model is further assessed by the comparison of its short-term forecasting performances with the ones obtained from a linear autoregression and a standard SETAR. It turns out that the bounce-back models one-step ahead forecasts generally outperform the other ones, and particularly so during the last recovery period in 2009Q3-2010Q4.

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Paper provided by THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise in its series THEMA Working Papers with number 2011-23.

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Date of creation: 2011
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Handle: RePEc:ema:worpap:2011-23
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  1. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-84, March.
  2. Sichel, Daniel E, 1994. "Inventories and the Three Phases of the Business Cycle," Journal of Business & Economic Statistics, American Statistical Association, vol. 12(3), pages 269-77, July.
  3. Hansen, Bruce E, 1996. "Inference When a Nuisance Parameter Is Not Identified under the Null Hypothesis," Econometrica, Econometric Society, vol. 64(2), pages 413-30, March.
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  5. Bec, F. & Bouabdallah, O. & Ferrara, L., 2011. "The possible shapes of recoveries in Markov-switching models," Working papers 321, Banque de France.
  6. George Kapetanios, 2003. "Threshold models for trended time series," Empirical Economics, Springer, vol. 28(4), pages 687-707, November.
  7. Li, Jing, 2011. "Bootstrap prediction intervals for SETAR models," International Journal of Forecasting, Elsevier, vol. 27(2), pages 320-332, April.
  8. Friedman, Milton, 1993. "The "Plucking Model" of Business Fluctuations Revisited," Economic Inquiry, Western Economic Association International, vol. 31(2), pages 171-77, April.
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  11. Clements, M.P. & Franses, Ph.H.B.F. & Smith, J., 1999. "On SETAR non- linearity and forecasting," Econometric Institute Research Papers EI 9914-/A, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
  12. repec:adr:anecst:y:1991:i:20-21:p:06 is not listed on IDEAS
  13. Terasvirta, T & Anderson, H M, 1992. "Characterizing Nonlinearities in Business Cycles Using Smooth Transition Autoregressive Models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 7(S), pages S119-36, Suppl. De.
  14. Li, Jing, 2011. "Bootstrap prediction intervals for SETAR models," International Journal of Forecasting, Elsevier, vol. 27(2), pages 320-332.
  15. Chang-Jin Kim & James Morley & Jeremy M. Piger, 2003. "Nonlinearity and the permanent effects of recessions," Working Papers 2002-014, Federal Reserve Bank of St. Louis.
  16. Beaudry, Paul & Koop, Gary, 1993. "Do recessions permanently change output?," Journal of Monetary Economics, Elsevier, vol. 31(2), pages 149-163, April.
  17. Kapetanios, G., 1999. "Threshold Models for Trended Time Series," Cambridge Working Papers in Economics 9905, Faculty of Economics, University of Cambridge.
  18. Hansen, Bruce E. & Seo, Byeongseon, 2002. "Testing for two-regime threshold cointegration in vector error-correction models," Journal of Econometrics, Elsevier, vol. 110(2), pages 293-318, October.
  19. James Morley & Jeremy Piger, 2012. "The Asymmetric Business Cycle," The Review of Economics and Statistics, MIT Press, vol. 94(1), pages 208-221, February.
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