The Macroeconomy as a Random Forest

Philippe Goulet Coulombe
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Philippe Goulet Coulombe: University of Pennsylvania

No 21-05, Working Papers from Chair in macroeconomics and forecasting, University of Quebec in Montreal's School of Management

Abstract: I develop Macroeconomic Random Forest (MRF), an algorithm adapting the canonical Machine Learning (ML) tool to flexibly model evolving parameters in a linear macro equation. Its main output, Generalized Time-Varying Parameters (GTVPs), is a versatile device nesting many popular nonlinearities (threshold/switching, smooth transition, structural breaks/change) and allowing for sophisticated new ones. The approach delivers clear forecasting gains over numerous alternatives, predicts the 2008 drastic rise in unemployment, and performs well for inflation. Unlike most ML-based methods, MRF is directly interpretable - via its GTVPs. For instance, the successful unemployment forecast is due to the influence of forward-looking variables (e.g., term spreads, housing starts) nearly doubling before every recession. Interestingly, the Phillips curve has indeed flattened, and its might is highly cyclical.

Pages: 77 pages
Date: 2021-06
New Economics Papers: this item is included in nep-big and nep-cmp
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https://chairemacro.esg.uqam.ca/wp-content/uploads/sites/146/PGC_RF.pdf Revised version, 2020 (application/pdf)

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