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Tackling Large Outliers in Macroeconomic Data with Vector Artificial Neural Network Autoregression

Author

Listed:
  • Vito Polito

    (Department of Economics, University of Sheffield, UK)

  • Yunyi Zhang

    (Xiamen University, China)

Abstract

We develop a regime switching vector autoregression where artificial neural networks drive time variation in the coefficients of the conditional mean of the endogenous variables and the variance covariance matrix of the disturbances. The model is equipped with a stability constraint to ensure non-explosive dynamics. As such, it is employable to account for nonlinearity in macroeconomic dynamics not only during typical business cycles but also in a wide range of extreme events, like deep recessions and strong expansions. The methodology is put to the test using aggregate data for the United States that include the abnormal realizations during the recent Covid-19 pandemic. The model delivers plausible and stable structural inference, and accurate out-of-sample forecasts. This performance compares favourably against a number of alternative methodologies recently proposed to deal with large outliers in macroeconomic data caused by the pandemic.

Suggested Citation

  • Vito Polito & Yunyi Zhang, 2022. "Tackling Large Outliers in Macroeconomic Data with Vector Artificial Neural Network Autoregression," Working Papers 2022004, The University of Sheffield, Department of Economics.
    • Handle: RePEc:shf:wpaper:2022004
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    File URL: https://www.sheffield.ac.uk/economics/research/serps
    File Function: First version, March 2022
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    More about this item

    Keywords

    Tax avoidance; Nonlinear time series; Regime switching models; Extreme events; Covid-19; Macroeconomic forecasting;
    All these keywords.

    JEL classification:

    • C45 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Neural Networks and Related Topics
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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