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Forecasting turning points in Canada

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  • Reinhart, Carmen
  • Reinhart, Vincent

Abstract

Economists have long been involved in the search for a few key indicators that predict the behavior of market economies. For Canada, it has been shown that the yield curve reliably tilts down and that real M1 growth declines before economic contraction, but this has been demonstrated almost exclusively in the context of single estimation equations or atheoretical VARs. This paper offers an alternative approach to the study of economic turning points. To qualify as a business-cycle indicator, a variable must behave differently when an economy is approaching or in recession than it does during economic expansions. That simple logic admits a variety of parametric and nonparametric tests of a variable’s usefulness, in forecasting. We examine the behavior around recessions of sixteen Canadian and U.S. time series. In the end we find that only the slopes of the Canadian and the U.S. term structure meet the prespecified criteria; the change in the nominal MCI and in real M1 follow behind.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 13884.

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Date of creation: Mar 1996
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Handle: RePEc:pra:mprapa:13884

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Keywords: business cycles monetary policy yield curve interest rates;

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References

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  1. Arturo Estrella & Frederic S. Mishkin, 1995. "The Term Structure of Interest Rates and Its Role in Monetary Policy for The European Central Bank," NBER Working Papers 5279, National Bureau of Economic Research, Inc.
  2. Barry Cozier & Greg Tkacz, . "The Term Structure and Real Activity in Canada," Working Papers, Bank of Canada 94-3, Bank of Canada.
  3. Ben Bernanke, 1990. "The Federal Funds Rate and the Channels of Monetary Transnission," NBER Working Papers 3487, National Bureau of Economic Research, Inc.
  4. Francis X. Diebold & Glenn D. Rudebusch, 1987. "Scoring the leading indicators," Special Studies Papers, Board of Governors of the Federal Reserve System (U.S.) 206, Board of Governors of the Federal Reserve System (U.S.).
  5. Zuliu Hu, 1993. "The Yield Curve and Real Activity," IMF Working Papers 93/19, International Monetary Fund.
  6. Estrella, Arturo & Hardouvelis, Gikas A, 1991. " The Term Structure as a Predictor of Real Economic Activity," Journal of Finance, American Finance Association, American Finance Association, vol. 46(2), pages 555-76, June.
  7. Zuliu Hu, 1993. "The Yield Curve and Real Activity," IMF Staff Papers, Palgrave Macmillan, vol. 40(4), pages 781-806, December.
  8. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 1(1), pages 19-46, January.
  9. Duguay, Pierre, 1994. "Empirical evidence on the strength of the monetary transmission mechanism in Canada: An aggregate approach," Journal of Monetary Economics, Elsevier, Elsevier, vol. 33(1), pages 39-61, February.
  10. Stock, J.H. & Watson, M.W., 1989. "New Indexes Of Coincident And Leading Economic Indicators," Papers, Harvard - J.F. Kennedy School of Government 178d, Harvard - J.F. Kennedy School of Government.
  11. Friedman, Benjamin M & Kuttner, Kenneth N, 1992. "Money, Income, Prices, and Interest Rates," American Economic Review, American Economic Association, American Economic Association, vol. 82(3), pages 472-92, June.
  12. Tiff Macklem & Alain Paquet & Louis Phaneuf, 1996. "Asymmetric Effects of Monetary Policy: Evidence from the Yield Curve," Cahiers de recherche CREFE / CREFE Working Papers, CREFE, Université du Québec à Montréal 42, CREFE, Université du Québec à Montréal.
  13. Neftici, Salih N., 1982. "Optimal prediction of cyclical downturns," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 4(1), pages 225-241, November.
  14. Robert D. Laurent, 1988. "An interest rate-based indicator of monetary policy," Economic Perspectives, Federal Reserve Bank of Chicago, Federal Reserve Bank of Chicago, issue Jan, pages 3-14.
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Cited by:
  1. 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.
  2. Arturo Estrella & Frederic S. Mishkin, 1995. "Predicting U.S. Recessions: Financial Variables as Leading Indicators," NBER Working Papers 5379, National Bureau of Economic Research, Inc.
  3. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, American Economic Association, vol. 89(3), pages 473-500, June.
  4. Reinhart, Carmen & Kaminsky, Graciela, 2000. "Las crisis gemelas: las causas de los problemas bancarios y de balanza de pagos
    [The twin crises: Te causes of banking and balance of payments problems]
    ," MPRA Paper 13842, University Library of Munich, Germany.
  5. Francis X. Diebold & Glenn D. Rudebusch, 2001. "Five questions about business cycles," Economic Review, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco, pages 1-15.

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