A1 Refereed original research article in a scientific journal
Forecasting US interest rates and business cycle with a nonlinear regime switching VAR model
Authors: Henri Nyberg
Publisher: John Wiley and Sons Ltd
Publication year: 2018
Journal: Journal of Forecasting
Journal name in source: Journal of Forecasting
Volume: 37
Issue: 1
First page : 1
Last page: 15
Number of pages: 15
ISSN: 0277-6693
eISSN: 1099-131X
DOI: https://doi.org/10.1002/for.2458
Abstract
This paper introduces a regime switching vector autoregressive model with time-varying regime probabilities, where the regime switching dynamics is described by an observable binary response variable predicted simultaneously with the variables subject to regime changes. Dependence on the observed binary variable distinguishes the model from various previously proposed multivariate regime switching models, facilitating a handy simulation-based multistep forecasting method. An empirical application shows a strong bidirectional predictive linkage between US interest rates and NBER business cycle recession and expansion periods. Due to the predictability of the business cycle regimes, the proposed model yields superior out-of-sample forecasts of the US short-term interest rate and the term spread compared with the linear and nonlinear vector autoregressive (VAR) models, including the Markov switching VAR model.
This paper introduces a regime switching vector autoregressive model with time-varying regime probabilities, where the regime switching dynamics is described by an observable binary response variable predicted simultaneously with the variables subject to regime changes. Dependence on the observed binary variable distinguishes the model from various previously proposed multivariate regime switching models, facilitating a handy simulation-based multistep forecasting method. An empirical application shows a strong bidirectional predictive linkage between US interest rates and NBER business cycle recession and expansion periods. Due to the predictability of the business cycle regimes, the proposed model yields superior out-of-sample forecasts of the US short-term interest rate and the term spread compared with the linear and nonlinear vector autoregressive (VAR) models, including the Markov switching VAR model.
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