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Misclassification-Errors-Adjusted Sahm Rule for Early Identification of Economic Recession

Shuaizhang Feng () and Jiandong Sun ()
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Shuaizhang Feng: Jinan University
Jiandong Sun: Jinan University

No 2020-029, Working Papers from Human Capital and Economic Opportunity Working Group

Abstract: Accurate identification of economic recessions in a timely fashion is a major macroeconomic challenge. The most successful early detector of recessions, the Sahm rule, relies on changes in unemployment rates, and is thus subject to measurement errors in the U.S. labor force statuses based on survey data. We propose a novel misclassification-error-adjusted Sahm recession indicator and provide empirically-based optimal threshold values. Using historical data, we show that the adjusted Sahm rule offers earlier identification of economic recessions. Based on the newly released U.S. unemployment rate in March 2020, our adjusted Sahm rule diagnoses the U.S. economy is already in recession, while the original Sahm rule does not.

Keywords: economic recession; Sahm rule; misclassification; unemployment rate (search for similar items in EconPapers)
JEL-codes: J64 E37 (search for similar items in EconPapers)
Date: 2020-05
New Economics Papers: this item is included in nep-mac and nep-ore
Note: MIP
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