Forecasting Euro-area recessions using time-varying binary response models for financial

C. Bell go and Laurent Ferrara

Working papers from Banque de France

Abstract: Recent macroeconomic evolutions during the years 2008 and 2009 have pointed out the impact of financial markets on economic activity. In this paper, we propose to evaluate the ability of a set of financial variables to forecast recessions in the euro area by using a non-linear binary response model associated with information combination. Especially, we focus on a time-varying probit model whose parameters evolve according to a Markov chain. For various forecast horizons, we provide a readable and leading signal of recession by combining information according to two combining schemes over the sample 1970-2006. First we average recession probabilities and second we linearly combine variables through a dynamic factor model in order to estimate an innovative factor-augmented probit model. Out-of-sample results over the period 2007-2008 show that financial variables would have been helpful in predicting a recession signal as September 2007, that is around six months before the effective start of the 2008-2009 recession in the euro area.

Keywords: Macroeconomic forecasting; Business cycles; Turning points; Financial markets; Non-linear time series; Combining forecasts. (search for similar items in EconPapers)
JEL-codes: C53 E32 E44 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2009
New Economics Papers: this item is included in nep-cba, nep-ecm, nep-eec, nep-fdg, nep-for and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (22)

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Persistent link: https://EconPapers.repec.org/RePEc:bfr:banfra:259

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