A Non-Linear Forecasting Model of GDP Growth

  title={A Non-Linear Forecasting Model of GDP Growth},
  author={David N. DeJong and Jean-François Richard},
We develop a forecasting model of GDP growth that features regime-switching behavior and an error-correction mechanism (ECM). Regime changes are manifested in the behavior of a stochastic regime drift component that moves between expansionary and contractionary phases, thus generating cycles in GDP growth. Regime changes are triggered stochastically by an observable indicator variable we refer to as a tension index. This is constructed as the geometric sum of deviations of actual GDP growth… CONTINUE READING