Predicting recessions: financial cycle versus term spread
Claudio Borio (),
Mathias Drehmann and
Dora Xia Author-X-Name_First: Dora
No 818, BIS Working Papers from Bank for International Settlements
Financial cycles can be important drivers of real activity, but there is scant evidence about how well they signal recession risks. We run a horse race between the term spread - the most widely used indicator in the literature - and 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 in nearly all specifications. These results are robust to different recession specifications.
Keywords: financial cycle; term spread; recession risk; panel probit mode (search for similar items in EconPapers)
JEL-codes: C33 E37 E44 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fdg, nep-for, nep-ifn and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:bis:biswps:818
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