Forecasting macro variables with a Qual VAR business cycle turning point index

One criticism of VAR forecasting is that macroeconomic variables tend not to behave as linear functions of their own past around business cycle turning points. This article investigates the methods and efficacy of forecasting with a VAR that expands the information set to include dynamic forecasts of a qualititative variable - business cycle turning points. We apply this Qual VAR model to five of the G7 economies and find that the Qual VAR improves on forecasts from standard models, both for the qualitative variable and for macroeconomic data, such as industrial production. The improvement in the forecasts of the qualitative variable, relative to the standard probit model, is especially pronounced in recessionary periods. ; (earlier title: Forecasting output with information from business cycle turning points: a qualitative variable VAR)