Forecasting U.S. Recessions and Economic Activity

Rachidi Kotchoni and Dalibor Stevanovic

No 2016-40, EconomiX Working Papers from University of Paris Nanterre, EconomiX

Abstract: This paper proposes a framework to produce real time multi-horizon forecasts of business cycle turning points, average forecasts of economic activity as well as conditional forecasts that depend on whether the horizon of interest belongs to a recession episode or not. Our forecasting models take the form of an autoregression of order one that is augmented with either a probability of recession or an inverse Mills ratio. Our empirical results suggest that a static Probit model that uses only the Term Spread as regressor provides comparable fit to the data as more sophisticated non-static Probit models. We also find that the dynamic patterns of the Term Structure of recession probabilities are quite informative about business cycle turning points. Our most parsimonious augmented autoregressive model delivers better out-of-sample forecasts of GDP growth than the benchmark models considered. We construct several Term Structures of recession probabilities since the last official NBER turning point. The results suggest that there has been no harbinger of a recession for the US economy since 2010Q4 and that there is none to fear at least until 2018Q1. GDP growth is expected to rise steadily between 2016Q3 and 2018Q1 in the range [2.5%,3.5%].

Keywords: Augmented Autoregressive Model; Conditional Forecasts; Economic Activity; Inverse Mills Ratio; Probit; Recession. (search for similar items in EconPapers)
JEL-codes: C35 C53 E27 E37 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2016
New Economics Papers: this item is included in nep-afr, nep-for and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Working Paper: Forecasting U.S. Recessions and Economic Activity (2016)
Working Paper: Forecasting U.S. Recessions and Economic Activity (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:drm:wpaper:2016-40

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