Forecasting Brazilian Output in the Presence of Breaks: A Comparison of Linear and Nonlinear Models
Marcelle Chauvet, Elcyon C. R. Lima, and Brisne Vasquez
Working Paper 2002-28
This paper compares the forecasting performance of linear and nonlinear models under the presence of structural breaks for the Brazilian real GDP growth. The Markov-switching models proposed by Hamilton (1989) and its generalized version proposed by Lam (1991) are applied to quarterly GDP from 1975:1 to 2000:2 allowing for breaks at the Collor Plans. The probabilities of recessions are used to analyze the Brazilian business cycle. The ability of each model in forecasting out-of-sample the growth rates of GDP is examined. The forecasting ability of the two models is also compared with linear specifications. The authors find that nonlinear models display the best forecasting performance and that specifications including the presence of structural breaks are important in obtaining a representation of the Brazilian business cycle.
JEL classification: C32, E32
Keywords: forecast, business cycle, nonlinearities, structural breaks, Markov switching
The views expressed here are the authors’ and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors’ responsibility.
Please address questions regarding content to Marcelle Chauvet, Research Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street, N.E., Atlanta, Georgia 30309-4470, email@example.com, 404-498-8630, 404-498-8956 (fax); Elcyon C. R. Lima, Research Department, IPEA, Institute of Applied Economic Research, Av. Pres. Antonio Carlos, 51, Rio de Janeiro, RJ 20020-010, Brazil; 55(21) 23804-8000, firstname.lastname@example.org; or Brisne Vasquez , Research Department, IPEA, Institute of Applied Economic Research, Av. Pres. Antonio Carlos, 51, Rio de Janeiro, RJ 20020-010, Brazil; 55(21) 23804-8000; email@example.com.