1887

OECD Economics Department Working Papers

Working papers from the Economics Department of the OECD that cover the full range of the Department’s work including the economic situation, policy analysis and projections; fiscal policy, public expenditure and taxation; and structural issues including ageing, growth and productivity, migration, environment, human capital, housing, trade and investment, labour markets, regulatory reform, competition, health, and other issues.

The views expressed in these papers are those of the author(s) and do not necessarily reflect those of the OECD or of the governments of its member countries.

English, French

Adaptive Trees: a new approach to economic forecasting

The present paper develops Adaptive Trees, a new machine learning approach specifically designed for economic forecasting. Economic forecasting is made difficult by economic complexity, which implies non-linearities (multiple interactions and discontinuities) and unknown structural changes (the continuous change in the distribution of economic variables). The forecast methodology aims at addressing these challenges. The algorithm is said to be “adaptive” insofar as it adapts to the quantity of structural change it detects in the economy by giving more weight to more recent observations. The performance of the algorithm in forecasting GDP growth 3- to 12-months ahead is assessed through simulations in pseudo-real-time for six major economies (USA, UK, Germany, France, Japan, Italy). The performance of Adaptive Trees is on average broadly similar to forecasts obtained from the OECD’s Indicator Model and generally performs better than a simple AR(1) benchmark model as well as Random Forests and Gradient Boosted Trees.

English

Keywords: machine learning, short-term forecasts, GDP growth, feature engineering, business cycles, interpretable AI, forecasting, concept drift, structural change
JEL: C01: Mathematical and Quantitative Methods / General / Econometrics; C63: Mathematical and Quantitative Methods / Mathematical Methods; Programming Models; Mathematical and Simulation Modeling / Computational Techniques; Simulation Modeling; C45: Mathematical and Quantitative Methods / Econometric and Statistical Methods: Special Topics / Neural Networks and Related Topics; E37: Macroeconomics and Monetary Economics / Prices, Business Fluctuations, and Cycles / Prices, Business Fluctuations, and Cycles: Forecasting and Simulation: Models and Applications; C23: Mathematical and Quantitative Methods / Single Equation Models; Single Variables / Single Equation Models; Single Variables: Panel Data Models; Spatio-temporal Models; C18: Mathematical and Quantitative Methods / Econometric and Statistical Methods and Methodology: General / Methodological Issues: General; C53: Mathematical and Quantitative Methods / Econometric Modeling / Forecasting Models; Simulation Methods
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