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.

Recommended Citation

Clive W.J. Granger (2008) "Non-Linear Models: Where Do We Go Next - Time Varying Parameter Models?", Studies in Nonlinear Dynamics & Econometrics: Vol. 12: No. 3, Article 1.
http://www.bepress.com/snde/vol12/iss3/art1