Economic policy uncertainty, financial markets and probability of US recessions

Lilia Karnizova and Li, Jiaxiong (Chris)

Economics Letters, 2014, vol. 125, issue 2, 261-265

Abstract: We use probit recession forecasting models to assess the ability of economic policy uncertainty indexes developed by Baker et al. (2013) to predict future US recessions. The model specifications include policy indexes on their own, and in combination with financial variables, such as interest rate spreads, stock returns and stock market volatility. Both in-sample and out-of-sample analysis suggests that the policy uncertainty indexes are statistically and economically significant in forecasting recessions at the horizons beyond five quarters. The index based on newspaper reports emerges as the best predictor, outperforming the term spread at the longer forecast horizons.

Keywords: Policy uncertainty; Recession forecast; Term spread; Probit regression (search for similar items in EconPapers)
JEL-codes: E32 E37 E44 E52 E62 (search for similar items in EconPapers)
Date: 2014
References: Add references at CitEc
Citations: View citations in EconPapers (147)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:125:y:2014:i:2:p:261-265

DOI: 10.1016/j.econlet.2014.09.018

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