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Nonlinear models, composite longer leading indicator and forecasts for UK real GDP

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Abstract:

This paper examines the role of the Office for National Statistics Composite Longer Leading Indicator, in nonlinear business cycle models for growth rates of UK real gross domestic product (GDP). These models are of the smooth transition regression class, with the transition between “regimes” expressed as functions of lagged changes in the leading indicator. In general, evidence is found of business cycle regime asymmetries, with increases and decreases in the leading indicator implying distinct responses for the dependent variable. Single transition function appears to capture these asymmetries satisfactorily. Nonlinear models provide more accurate one-step ahead forecasts than corresponding linear leading indicator models.

Document Type: Research Article

DOI: http://dx.doi.org/10.1080/00036840500399784

Affiliations: Department of Economics, Middle East Technical University, Ankara 06531, Turkey

Publication date: May 20, 2006

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