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Forecasting the end of the global recession: did we miss the early signs?

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  • Adriana Z. Fernandez
  • Alex Nikolsko-Rzhevskyy

Abstract

This paper looks at the term-structure literature to identify early signs predicting recessionary patterns in the U.S. and other developed economies. Based on the National Bureau of Economic Research (NBER) and Economic Cycle Research Institute (ECRI) recession dates, we define the probability of recession as a function of the traditional yield spread, plus a forward-looking measure of growth expectations, namely the output gap growth spread. For other countries, we extend the model and make it additionally dependent on the probability of recession in the U.S. Our results indicate that most of the a-posteriori official recession dates could have been forecast as early as April 2009, when the first green shoots of recovery appeared in the U.S. data. Overall, the term-structure versions we apply allow us to signal recessions earlier and more accurately than traditional term-structure models and most professional forecasters.

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Bibliographic Info

Article provided by Federal Reserve Bank of Dallas in its journal Staff Papers.

Volume (Year): (2011)
Issue (Month): Apr ()
Pages:

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Handle: RePEc:fip:feddst:y:2011:i:apr:n:12

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Web page: http://www.dallasfed.org/
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Keywords: Forecasting ; Macroeconomics - Econometric models ; International finance;

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  1. Francis X. Diebold & Glenn D. Rudebusch & S. Boragan Aruoba, 2004. "The Macroeconomy and the Yield Curve: A Dynamic Latent Factor Approach," NBER Working Papers 10616, National Bureau of Economic Research, Inc.
  2. Michael Dueker, 1997. "Strengthening the case for the yield curve as a predictor of U.S. recessions," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 41-51.
  3. Arturo Estrella & Anthony P. Rodrigues & Sebastian Schich, 2003. "How Stable is the Predictive Power of the Yield Curve? Evidence from Germany and the United States," The Review of Economics and Statistics, MIT Press, vol. 85(3), pages 629-644, August.
  4. Sharon Kozicki, 1997. "Predicting real growth and inflation with the yield spread," Economic Review, Federal Reserve Bank of Kansas City, issue Q IV, pages 39-57.
  5. Athanasios Orphanides & Simon van Norden, 2003. "The Reliability of Inflation Forecasts Based on Output Gap Estimates in Real Time," CIRANO Working Papers 2003s-01, CIRANO.
  6. Evan F. Koenig & Kenneth M. Emery, 1991. "Misleading indicators? Using the composite leading indicators to predict cyclical turning points," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, issue Jul, pages 1-14.
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