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Monetary policy, composite leading economic indicators and predicting the 2001 recession

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  • Mehdi Mostaghimi

    (School of Business, Southern Connecticut State University, USA)

Abstract

On 26 November 2001, the National Bureau of Economic Research announced that the US economy had officially entered into a recession in March 2001. This decision was a surprise and did not end all the conflicting opinions expressed by economists. This matter was finally settled in July 2002 after a revision to the 2001 real gross domestic product showed negative growth rates for its first three quarters. A series of political and economic events in the years 2000-01 have increased the amount of uncertainty in the state of the economy, which in turn has resulted in the production of less reliable economic indicators and forecasts. This paper evaluates the performance of two very reliable methodologies for predicting a downturn in the US economy using composite leading economic indicators (CLI) for the years 2000-01. It explores the impact of the monetary policy on CLI and on the overall economy and shows how the gradualness and uncertainty of this impact on the overall economy have affected the forecasts of these methodologies. It suggests that the overexposure of the CLI to the monetary policy tools and a strong, but less effective, expansionary money policy have been the major factors in deteriorating the predictions of these methodologies. To improve these forecasts, it has explored the inclusion of the CLI diffusion index as a prior in the Bayesian methodology. Copyright © 2004 John Wiley & Sons, Ltd.

Suggested Citation

  • Mehdi Mostaghimi, 2004. "Monetary policy, composite leading economic indicators and predicting the 2001 recession," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 23(7), pages 463-477.
  • Handle: RePEc:jof:jforec:v:23:y:2004:i:7:p:463-477
    DOI: 10.1002/for.923
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    File URL: http://hdl.handle.net/10.1002/for.923
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    References listed on IDEAS

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    1. Mostaghimi, Mehdi & Rezayat, Fahimeh, 1996. "Probability Forecast of Downturn in U.S. Economy Using Classical Statistical Decision Theory," Empirical Economics, Springer, vol. 21(2), pages 255-279.
    2. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-384, March.
    3. Mehdi Mosthaghimi, 2001. "Are the New U.S. Composite Leading Economic Indicators More Informative?," Indian Economic Review, Department of Economics, Delhi School of Economics, vol. 36(1), pages 205-213, January.
    4. Michael J. Dueker, 2002. "Regime-dependent recession forecasts and the 2001 recession," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 29-36.
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    1. repec:eee:jouret:v:91:y:2015:i:2:p:289-308 is not listed on IDEAS
    2. Lafuente Luengo, Juan Ángel & Ruiz, Jesús & Pérez, Rafaela, 2011. "Estimating US persistent and transitory monetary shocks: implications for monetary policy," DEE - Working Papers. Business Economics. WB wb113108, Universidad Carlos III de Madrid. Departamento de Economía de la Empresa.
    3. Lafuente, Juan A. & Pérez, Rafaela & Ruiz, Jesús, 2014. "Time-varying inflation targeting after the nineties," International Review of Economics & Finance, Elsevier, vol. 29(C), pages 400-408.
    4. J. A. Lafuente & R. Pérez & J. Ruiz, 2018. "Disentangling permanent and transitory monetary shocks with a non-linear Taylor rule," Documentos de Trabajo del ICAE 2018-19, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico.

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