Forecasting recessions using financial variables: the French case

Francis Bismans and Reynald Majetti
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Francis Bismans: BETA - Bureau d'Économie Théorique et Appliquée - INRA - Institut National de la Recherche Agronomique - UNISTRA - Université de Strasbourg - UL - Université de Lorraine - CNRS - Centre National de la Recherche Scientifique
Reynald Majetti: BETA - Bureau d'Économie Théorique et Appliquée - INRA - Institut National de la Recherche Agronomique - UNISTRA - Université de Strasbourg - UL - Université de Lorraine - CNRS - Centre National de la Recherche Scientifique

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Abstract: In this article, we focus on the ability of two financial variables—the yield curve spread and the euro–US dollar exchange rate—to predict French recessions over the period 1979–2010. First, we propose a turning point chronology for the French business cycle based on a classical conception of economic cycles and a non-parametric dating algorithm applied to the real GDP series. Second, static and dynamic probit models are developed and estimated to produce the recession probabilities. In-sample results show that the dynamic specification performs better than the static one and, above all, that the exchange rate has a stronger predictive power than the yield curve. Out-of-sample results finally confirm the predominant role assigned to the exchange rate in predicting the latest recession occurred in 2008.

Keywords: French business cycle; Dynamic probit; Recession forecasts; Term spread; EUR/USD exchange rate (search for similar items in EconPapers)
Date: 2013-04
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Citations: View citations in EconPapers (2)

Published in Empirical Economics, 2013, 44 (2), pp.419-433. ⟨10.1007/s00181-012-0550-z⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-01753806

DOI: 10.1007/s00181-012-0550-z

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