The macroeconomy as a random forest

Philippe Goulet Coulombe

Journal of Applied Econometrics, 2024, vol. 39, issue 3, 401-421

Abstract: I develop the 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, and 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 and housing starts) nearly doubling before every recession. Interestingly, the Phillips curve has indeed flattened, and its might is highly cyclical.

Date: 2024
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https://doi.org/10.1002/jae.3030

Related works:
Working Paper: The Macroeconomy as a Random Forest (2021)
Working Paper: The Macroeconomy as a Random Forest (2021)
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