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Structural break threshold VARs for predicting US recessions using the spread

Ana Galvão ()

Journal of Applied Econometrics, 2006, vol. 21, issue 4, 463-487

Abstract: This paper proposes a model to predict recessions that accounts for non-linearity and a structural break when the spread between long- and short-term interest rates is the leading indicator. Estimation and model selection procedures allow us to estimate and identify time-varying non-linearity in a VAR. The structural break threshold VAR (SBTVAR) predicts better the timing of recessions than models with constant threshold or with only a break. Using real-time data, the SBTVAR with spread as leading indicator is able to anticipate correctly the timing of the 2001 recession. Copyright © 2006 John Wiley & Sons, Ltd.

Date: 2006
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Handle: RePEc:jae:japmet:v:21:y:2006:i:4:p:463-487