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Konstantin A. Kholodilin
''Two Alternative Approaches to Modelling the Nonlinear Dynamics of the Composite Economic Indicator''
( 2002, Vol. 3 No.26 )
This paper sets up a common unobserved factor model with smooth transition autoregressive dynamics. This model is compared to the already classical common factor model with regime-switching. Both models' in-sample and out-of-sample performance in terms of capturing and predicting the business cycle turning points is evaluated. The comparison of the model-derived probabilities to the NBER business cycle dating shows statistically equivalent in-sample forecasting accuracy of these techniques. The common factor model with exponential STAR outperforms the model with logistic STAR and that with Markov switching in terms of out-of-sample prediction with up to 3 month horizon.
JEL: C5 - Econometric Modeling: General
E3 - Prices, Business Fluctuations, and Cycles: General (includes Measurement and Data)
Manuscript Received : Nov 06 2002 Manuscript Accepted : Nov 06 2002

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