Predicting the probability of recession in Croatia: Is economic sentiment the missing link?

Nataša Erjavec (), Petar Soriæ () and Mirjana Èižmešija ()
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Nataša Erjavec: Faculty of Economics and Business, University of Zagreb, Zagreb, Croatia
Petar Soriæ: Faculty of Economics and Business, University of Zagreb, Zagreb, Croatia
Mirjana Èižmešija: Faculty of Economics and Business, University of Zagreb, Zagreb, Croatia
Authors registered in the RePEc Author Service: Petar Sorić

Zbornik radova Ekonomskog fakulteta u Rijeci/Proceedings of Rijeka Faculty of Economics, 2016, vol. 34, issue 2, 555-579

Abstract: This paper aims to assess the possibility of predicting Croatian recessionary episodes using probit models. The authors first estimate a baseline static model using four leading indicators of recession (monetary base, unemployment, industrial production, and CROBEX stock market index). Lag lengths of up to 6 months are examined for each of the observed variables in the probit specification, and several important conclusions arise from the estimated models. First, the stock market and money supply exhibit the most pronounced leading characteristics in the Croatian economy (a 3-month lag length is selected by the information criteria). Second, the dynamic model (including a lagged dependent dummy variable) significantly outperforms the baseline static model. Third, the authors augment the probit model by the Economic Sentiment Indicator, which significantly contributes to the model accuracy. The latter confirms the main hypothesis of the paper, going in line with the assertion that psychological factors largely govern the economic cycles, growing in significance in times of economic hardship.

Keywords: recession forecasting; probit regression; Economic Sentiment Index; Business and Consumer Surveys (search for similar items in EconPapers)
JEL-codes: C22 C53 E32 E60 (search for similar items in EconPapers)
Date: 2016
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