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A Nonlinear Forecasting Model of GDP Growth

David N. DeJong1; Roman Liesenfeld2; Jean François Richard1

1 University of Pittsburgh · 2 Christian-Albrechts-Universität zu Kiel

The Review of Economics and Statistics 2005

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.

DOI
10.1162/003465305775098152
Volume
87 (4)
Pages
697-708
Language
en
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