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Predicting National and Regional Recessions Using Probit Modeling and Interest‐Rate Spreads

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  • Gary L. Shoesmith

Abstract

This study extends the work of Estrella and Mishkin (1996, 1998) to show that interest‐rate spreads and probit modeling can be used to predict recessions in many states as well as the nation. State recessions are defined as two or more consecutive quarters of declining real gross state product. The yield spread, SPREAD, is defined as the difference between the 10‐year Treasury bond rate and the three‐month Treasury bill rate. The national results are similar to those obtained by Estrella and Mishkin. Probit models are estimated for all 50 states using SPREAD and unemployment insurance claims, UI, as alternative explanatory variables. For 34 of the 50 states, SPREAD is significant at the 0.01 level as a predictor of state recessions. Much weaker results are obtained using UI. Simulations for the 1979–2001 period are used to compute loss functions for the national and state models at probability screens of 30, 40, 50, and 60 percent. The results demonstrate that probit models based on SPREAD can be useful in improving business and policy decisions in many states.

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  • Gary L. Shoesmith, 2003. "Predicting National and Regional Recessions Using Probit Modeling and Interest‐Rate Spreads," Journal of Regional Science, Wiley Blackwell, vol. 43(2), pages 373-392, May.
    • Handle: RePEc:bla:jregsc:v:43:y:2003:i:2:p:373-392
    DOI: 10.1111/1467-9787.00303
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    Cited by:

    1. Zhou, Wei-Xing & Sornette, Didier, 2004. "Causal slaving of the US treasury bond yield antibubble by the stock market antibubble of August 2000," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 337(3), pages 586-608.
    2. Thomas M. Fullerton, Jr & Laura M. Saenz Rojo, 2018. "Yield Spreads, The Exchange Rate, and Recession Predictability for Northern Mexico Border Economies," Asian Journal of Economic Modelling, Asian Economic and Social Society, vol. 6(1), pages 56-64, March.
    3. Zietz, Joachim A. & Penn, David A., 2008. "An Unobserved Components Forecasting Model of Non-Farm Employment for the Nashville MSA," Journal of Regional Analysis and Policy, Mid-Continent Regional Science Association, vol. 38(1), pages 1-10.

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