Non-Linear Models: Where Do We Go Next - Time Varying Parameter Models?

Clive Granger

Studies in Nonlinear Dynamics & Econometrics, 2008, vol. 12, issue 3, 11

Abstract: Although linear models have been the central focus of econometrics for most of the twentieth century, great developments in non-linear models took place from the latter part of the century. This paper questions the future development of non-linear models in economics and shows (via White's Theorem) that any non-linear model can be approximated by a time-varying parameter linear model. Compared with non-linear models, multi-step forecasts are more easily prepared using time-varying parameter models, while they are also more readily interpretable and theoretical results on aggregation are straightforward to obtain. Nevertheless, there is some evidence that subtle non-linearities may exist in macroeconomic time series.

Date: 2008
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DOI: 10.2202/1558-3708.1639

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