Business cycle non-linearities in UK consumption and production

This paper develops non-linear smooth transition autoregressive (STAR) mode ls with two additive smooth transition components to capture the business c ycle characteristics of UK real consumers' expenditure and industrial produ ction. The results indicate consumption has essentially two business cycle regimes: recession and expansion. Industrial production, however, is charac terized by the three regimes of recession, normal growth and high growth. T he transitions describing recovery from recession are very similar for the two variables. Stochastic simulations illustrate the dynamic responses of t hese models and emphasize that they are locally linear. Our results also in dicate that the two-transition STAR models have some forecast advantages ov er other specifications for periods of contraction. Copyright (C) 2000 John Wiley & Sons, Ltd.