A Nonlinear Forecasting Model of GDP Growth

We develop a model of GDP growth under which regime changes are triggered stochastically by an observable tension index, constructed as the geometric sum of deviations of actual GDP growth from a corresponding sustainable rate. Within expansionary regimes, the tension index tends to increase, which...

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Bibliographic Details
Published in:The review of economics and statistics 2005-11, Vol.87 (4), p.697-708
Main Authors: DeJong, David N., Liesenfeld, Roman, Richard, Jean-François
Format: Article
Language:English
Subjects:
Economic fluctuations
Economic forecasting
Economic growth models
Economic models
Economic recessions
Forecasting models
GDP
Gross Domestic Product
Gross domestic product indices
Modeling
Probabilities
Regression analysis
Studies
Sustainable growth
Trajectories
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Summary:We develop a model of GDP growth under which regime changes are triggered stochastically by an observable tension index, constructed as the geometric sum of deviations of actual GDP growth from a corresponding sustainable rate. Within expansionary regimes, the tension index tends to increase, which heightens the probability of a regime change. Given a regime change, the process becomes reversed, and the tension index begins to decline along a newly established path. Linking the behavior of the tension index to GDP growth enables us to capture floor and ceiling effects.
ISSN:0034-6535
1530-9142
DOI:10.1162/003465305775098152