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Adaptive Trees: a new approach to economic forecasting

Author

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  • Nicolas Woloszko

Abstract

The present paper develops Adaptive Trees, a new machine learning approach specifically designed for economic forecasting. Economic forecasting is made difficult by economic complexity, which implies non-linearities (multiple interactions and discontinuities) and unknown structural changes (the continuous change in the distribution of economic variables). The forecast methodology aims at addressing these challenges. The algorithm is said to be “adaptive” insofar as it adapts to the quantity of structural change it detects in the economy by giving more weight to more recent observations. The performance of the algorithm in forecasting GDP growth 3- to 12-months ahead is assessed through simulations in pseudo-real-time for six major economies (USA, UK, Germany, France, Japan, Italy). The performance of Adaptive Trees is on average broadly similar to forecasts obtained from the OECD’s Indicator Model and generally performs better than a simple AR(1) benchmark model as well as Random Forests and Gradient Boosted Trees.

Suggested Citation

  • Nicolas Woloszko, 2020. "Adaptive Trees: a new approach to economic forecasting," OECD Economics Department Working Papers 1593, OECD Publishing.
    • Handle: RePEc:oec:ecoaaa:1593-en
    DOI: 10.1787/5569a0aa-en
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    Citations

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    Cited by:

    1. Philippe Goulet Coulombe, 2020. "The Macroeconomy as a Random Forest," Papers 2006.12724, arXiv.org, revised Mar 2021.
    2. Philippe Goulet Coulombe, 2021. "The Macroeconomy as a Random Forest," Working Papers 21-05, Chair in macroeconomics and forecasting, University of Quebec in Montreal's School of Management.
    3. Goyal, Raghav & Adjemian, Michael K. & Glauber, Joseph & Meyer, Seth, 2023. "Decomposing USDA Ending Stocks Forecast Errors," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 48(2), May.

    More about this item

    Keywords

    business cycles; concept drift; feature engineering; forecasting; GDP growth; interpretable AI; machine learning; short-term forecasts; structural change;
    All these keywords.

    JEL classification:

    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
    • C18 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Methodolical Issues: General
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • C45 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Neural Networks and Related Topics
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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