The European Way Out of Recessions
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  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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- Chang-Jin Kim & James Morley & Jeremy Piger, 2003.
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2002-014, Federal Reserve Bank of St. Louis.
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- Li, Jing, 2011. "Bootstrap prediction intervals for SETAR models," International Journal of Forecasting, Elsevier, vol. 27(2), pages 320-332, April.
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"The Possible Shapes of Recoveries in Markov-Switching Models,"
2011-02, Centre de Recherche en Economie et Statistique.
- Bec Frederique & Othman Bouabdallah & Laurent Ferrara, 2011. "The possible shapes of recoveries in Markov-Switching models," THEMA Working Papers 2011-02, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
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- James Morley & Jeremy Piger, 2012. "The Asymmetric Business Cycle," The Review of Economics and Statistics, MIT Press, vol. 94(1), pages 208-221, February.
- Kapetanios, G., 1999. "Threshold Models for Trended Time Series," Cambridge Working Papers in Economics 9905, Faculty of Economics, University of Cambridge.
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