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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

Abstract: 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
Date: 2019-10
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