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Predicting Canadian Recessions Using Financial Variables: A Probit Approach

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Author Info

  • Atta-Mensah, Joseph
  • Tkacz, Greg

Abstract

This paper examines the ability of a number of financial variables to predict Canadian recessions. Regarding methodology, we follow closely the technique employed by Estrella and Mishkin (1998), who use a probit model to predict U.S. recessions up to eight quarters in advance. Our main finding is that the spread between the yield on Canadian long bonds and the 90-day commercial paper rate is particularly useful in predicting Canadian recessions. This result is consistent with those of Estrella and Mishkin (1998).

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File URL: http://www.bankofcanada.ca/wp-content/uploads/2010/05/wp98-5.pdf
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Bibliographic Info

Paper provided by Bank of Canada in its series Working Papers with number 98-5.

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Length: 38 pages
Date of creation: 1998
Date of revision:
Handle: RePEc:bca:bocawp:98-5

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Related research

Keywords: Business fluctuations and cycles; Interest rates;

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References

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  1. Estrella, Arturo & Hardouvelis, Gikas A, 1991. " The Term Structure as a Predictor of Real Economic Activity," Journal of Finance, American Finance Association, vol. 46(2), pages 555-76, June.
  2. Stock, J.H. & Watson, M.W., 1989. "New Indexes Of Coincident And Leading Economic Indicators," Papers 178d, Harvard - J.F. Kennedy School of Government.
  3. Frankel, Jeffrey A & Lown, Cara S, 1994. "An Indicator of Future Inflation Extracted from the Steepness of the Interest Rate Yield Curve along Its Entire Length," The Quarterly Journal of Economics, MIT Press, vol. 109(2), pages 517-30, May.
  4. Henri Bernard & Stefan Gerlach, 1996. "Does the term structure predict recessions? The international evidence," BIS Working Papers 37, Bank for International Settlements.
  5. Tiff Macklem & Alain Paquet & Louis Phaneuf, 1996. "Asymmetric Effects of Monetary Policy: Evidence from the Yield Curve," Cahiers de recherche CREFE / CREFE Working Papers 42, CREFE, Université du Québec à Montréal.
  6. Barry Cozier & Greg Tkacz, . "The Term Structure and Real Activity in Canada," Working Papers 94-3, Bank of Canada.
  7. Campbell R. Harvey, 1997. "The Relation between the Term Structure of Interest Rates and Canadian Economic Growth," Canadian Journal of Economics, Canadian Economics Association, vol. 30(1), pages 169-93, February.
  8. W. A. Beckett, 1961. "Indicators of Cyclical Recessions and Revivals in Canada," NBER Chapters, in: Business Cycle Indicators, Volume 1, pages 294-324 National Bureau of Economic Research, Inc.
  9. Jim Day & Ron Lange, 1997. "The Structure of Interest Rates in Canada: Information Content about Medium-Term Inflation," Working Papers 97-10, Bank of Canada.
  10. Geoffrey H. Moore, 1961. "Leading and Confirming Indicators of General Business Changes," NBER Chapters, in: Business Cycle Indicators, Volume 1, pages 45-109 National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. Milda Maria Burzala, 2012. "The Probability of Recession in Poland Based on the Hamilton Switching Model and the Logit Model," Dynamic Econometric Models, Uniwersytet Mikolaja Kopernika, vol. 12, pages 73-88.
  2. Pons Novell, J., 2002. "Ciclo de la economía española y contenido informativo de los tipos de interés," Estudios de Economía Aplicada, Estudios de Economía Aplicada, vol. 20, pages 583-598, Diciembre.
  3. James D. Hamilton & Dong Heon Kim, 2000. "A Re-examination of the Predictability of Economic Activity Using the Yield Spread," NBER Working Papers 7954, National Bureau of Economic Research, Inc.
  4. Mili, Mehdi & Sahut, Jean-Michel & Teulon, Frédéric, 2012. "Non linear and asymmetric linkages between real growth in the Euro area and global financial market conditions: New evidence," Economic Modelling, Elsevier, vol. 29(3), pages 734-741.
  5. Esther Fernández Galar & Javier Gómez Biscarri, 2003. "Revisiting the Ability of Interest Rate Spreads to Predict Recessions: Evidence for a," Faculty Working Papers 04/03, School of Economics and Business Administration, University of Navarra.
  6. Viktor Kotlán, 2001. "Monetary policy and the term structure of interest rates in a small open economy - a model framework approach," Macroeconomics 0110003, EconWPA.
  7. Peter Sephton, 2001. "Forecasting recessions: can we do better on MARS?," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 39-49.
  8. Jean-Michel Sahut & Medhi Mili & Frédéric Teulon, 2014. "What is the linkage between real growth in the Euro area and global financial market conditions ?," Working Papers 2014-324, Department of Research, Ipag Business School.
  9. Switzer, Lorne N., 2010. "The behaviour of small cap vs. large cap stocks in recessions and recoveries: Empirical evidence for the United States and Canada," The North American Journal of Economics and Finance, Elsevier, vol. 21(3), pages 332-346, December.
  10. Souki, Kaouthar, 2008. "Assessing the effects of U.S. shocks on the Canadian economy using alternative identification methods," The North American Journal of Economics and Finance, Elsevier, vol. 19(2), pages 193-213, August.
  11. Sylvain Martel, 2005. "Y a-t-il eu surinvestissement au Canada durant la seconde moitié des années 1990?," Working Papers 05-5, Bank of Canada.
  12. Javier Gómez, . "Changes in the Informational Content of the Spread: Is Monetary Policy Becoming Less Effective?," Faculty Working Papers 05/07, School of Economics and Business Administration, University of Navarra.

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