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Working Paper 2001-012B

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"Dynamic Forecasting of Qualitative Variables: A Qual VAR Model of U.S. Recessions"
by Michael J. Dueker

This article presents a new Qual VAR model for incorporating information from qualitative and/or discrete variables in vector autoregressions. With a Qual VAR, it is possible to create dynamic forecasts of the qualitative variable using standard VAR projections. Previous forecasting methods for qualitative variables, in contrast, only produce static forecasts. I apply the Qual VAR to forecasting the 2001 business recession out of sample and to analyzing the Romer and Romer (1989) narrative measure of monetary policy contractions as an endogenous variable in a VAR. Out of sample, the model predicts the timing of the 2001 recession quite well relative to the recession probabilities put forth at the time by professional forecasters. Qual VARs -- which include information about the qualitative variable -- can also enhance the quality of density forecasts of the other variables in the system.

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Category > Applied Econometrics
Category > Monetary Policy/Macroeconomics
Author > Michael J. Dueker