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The limited usefulness of macroeconomic Bayesian VARs when estimating the probability of a US recession

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  • Österholm, Pär

Abstract

The Bayesian VAR model provides a convenient tool for generating predictive densities and making probability statements regarding the future development of economic variables. This paper investigates the usefulness of standard macroeconomic Bayesian VAR models to estimate the probability of a US recession. Defining a recession as two quarters in a row of negative GDP growth, the probability is estimated for two quarters of the most recent US recession, namely 2008Q3–2008Q4. In contrast to judgemental probabilities from this point in time, it is found that the BVAR assigns a very low probability to such an event. This is true also when survey data, which generally are considered as good leading indicators, are included in the models. We conclude that while Bayesian VAR models are good forecasting tools in many cases, the results in this paper raise question marks regarding their usefulness for predicting recessions.

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  • Österholm, Pär, 2012. "The limited usefulness of macroeconomic Bayesian VARs when estimating the probability of a US recession," Journal of Macroeconomics, Elsevier, vol. 34(1), pages 76-86.
  • Handle: RePEc:eee:jmacro:v:34:y:2012:i:1:p:76-86
    DOI: 10.1016/j.jmacro.2011.10.002
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    Cited by:

    1. Schreiber, Sven & Soldatenkova, Natalia, 2016. "Anticipating business-cycle turning points in real time using density forecasts from a VAR," Journal of Macroeconomics, Elsevier, vol. 47(PB), pages 166-187.
    2. repec:aaa:journl:v:3:y:1999:i:1:p:87-100 is not listed on IDEAS
    3. repec:spr:empeco:v:53:y:2017:i:4:d:10.1007_s00181-016-1175-4 is not listed on IDEAS
    4. Schreiber, Sven, 2013. "Forecasting business-cycle turning points with (relatively large) linear systems in real time," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79709, Verein für Socialpolitik / German Economic Association.
    5. Pirschel, Inske, 2016. "Forecasting euro area recessions in real-time," Kiel Working Papers 2020, Kiel Institute for the World Economy (IfW).
    6. Pär Stockhammar & Pär Österholm, 2017. "The Impact of US Uncertainty Shocks on Small Open Economies," Open Economies Review, Springer, vol. 28(2), pages 347-368, April.

    More about this item

    Keywords

    Predictive density; Fan chart; Leading indicator; Survey data;

    JEL classification:

    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications

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