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"Forecasting Macro Variables with a Qual VAR Business Cycle Turning Point Index"
by Michael J. Dueker, and Katrin Wesche

One criticism of VAR forecasting is that macroeconomic variables tend not to behave as linear functions of their own past around business cycle turning points. A large literature focuses therefore on nonlinear forecasting models. This article investigates an alternative linear model that adds to the information set a latent index of nearness to a turning point. The latent index in this VAR is by construction negative during NBER recessions and positive during expansions. The Qual VAR model from Dueker (2005) infers and treats the business cycle turning point index as an additional endogenous variable. We apply the Qual VAR model to recursive out-of-sample forecasting and find that the Qual VAR improves on out-of-sample forecasts from a standard VAR, despite the increase in the number of model parameters that accompanies inclusion of the latent business cycle index.

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