Forecasting recessions: the importance of the financial cycle

Claudio Borio, Mathias Drehmann and Fan Dora Xia

Journal of Macroeconomics, 2020, vol. 66, issue C

Abstract: Financial cycles can be important drivers of real activity, but there is scant evidence about how well they signal recession risks. We address this question, using a range of financial cycle measures. Unlike most papers, ours assesses forecasting performance not just for the United States but also for a panel of advanced and emerging market economies. We find that financial cycle measures have significant forecasting power both in and out of sample, even for a three-year horizon. Moreover, they outperform the term spread - the most widely used indicator in the literature - in nearly all specifications. These results are robust to different recession specifications.

Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:66:y:2020:i:c:s016407042030183x

DOI: 10.1016/j.jmacro.2020.103258

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