The Role of Credit in Predicting US Recessions

Harri Pönkä

CREATES Research Papers from Department of Economics and Business Economics, Aarhus University

Abstract: We study the role of credit in forecasting US recession periods with probit models. We employ both classical recession predictors and common factors based on a large panel of financial and macroeconomic variables as control variables. Our findings suggest that a number of credit variables are useful predictors of US recessions over and above the control variables both in and out of sample. Especially the excess bond premium, capturing the cyclical changes in the relationship between default risk and credit spreads, is found to be a powerful predictor. Overall, models that combine credit variables, common factors, and classic recession predictors, are found to have the best forecasting performance.

Keywords: Business cycle; Credit Spread; Factor models; Forecasting; Probit models (search for similar items in EconPapers)
JEL-codes: C22 C25 E32 E37 (search for similar items in EconPapers)
Pages: 34
Date: 2015-11-08
New Economics Papers: this item is included in nep-ban, nep-bec, nep-for and nep-mac
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