Forecasting national recessions using state level data
AbstractA large literature studies the information contained in national-level economic indicators, such as financial and aggregate economic activity variables, for forecasting U.S. business cycle phases (expansions and recessions.) In this paper, we investigate whether there is additional information regarding business cycle phases contained in subnational measures of economic activity. Using a probit model to predict the NBER expansion and recession classification, we assess the forecasting benefits of adding state-level employment growth to a common list of national-level predictors. As state-level data adds a large number of variables to the model, we employ a Bayesian model averaging procedure to construct forecasts. Based on a variety of forecast evaluation metrics, we find that including state-level employment growth substantially improves short-horizon forecasts of the business cycle phase. The gains in forecast accuracy are concentrated during months of national recession. Posterior inclusion probabilities indicate substantial uncertainty regarding which states belong in the model, highlighting the importance of the Bayesian model averaging approach.>
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Bibliographic InfoPaper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2012-013.
Date of creation: 2012
Date of revision:
Other versions of this item:
- Owyang, Michael T. & Piger, Jeremy & Wall, Howard J., 2012. "Forecasting national recessions using state-level data," MPRA Paper 39168, University Library of Munich, Germany.
- C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-05-15 (All new papers)
- NEP-BEC-2012-05-15 (Business Economics)
- NEP-FOR-2012-05-15 (Forecasting)
- NEP-MAC-2012-05-15 (Macroeconomics)
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