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Forecasting recessions: the importance of the financial cycle

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  • Borio, Claudio
  • Drehmann, Mathias
  • Xia, Fan Dora

Abstract

Financial cycles can be important drivers of real activity, but there is scant evidence about how well they signal recession risks. We address this question, using a range of financial cycle measures. Unlike most papers, ours assesses forecasting performance not just for the United States but also for a panel of advanced and emerging market economies. We find that financial cycle measures have significant forecasting power both in and out of sample, even for a three-year horizon. Moreover, they outperform the term spread - the most widely used indicator in the literature - in nearly all specifications. These results are robust to different recession specifications.

Suggested Citation

  • Borio, Claudio & Drehmann, Mathias & Xia, Fan Dora, 2020. "Forecasting recessions: the importance of the financial cycle," Journal of Macroeconomics, Elsevier, vol. 66(C).
    • Handle: RePEc:eee:jmacro:v:66:y:2020:i:c:s016407042030183x
    DOI: 10.1016/j.jmacro.2020.103258
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