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Forecasting recessions using the yield curve

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  • Marcelle Chauvet

    (Federal Reserve Bank of Atlanta and University of California, USA)

  • Simon Potter

    (Federal Reserve Bank of New York, USA)

Abstract

We compare forecasts of recessions using four different specifications of the probit model: a time invariant conditionally independent version; a business cycle specific conditionally independent model; a time invariant probit with autocorrelated errors; and a business cycle specific probit with autocorrelated errors. The more sophisticated versions of the model take into account some of the potential underlying causes of the documented predictive instability of the yield curve. We find strong evidence in favour of the more sophisticated specification, which allows for multiple breakpoints across business cycles and autocorrelation. We also develop a new approach to the construction of real time forecasting of recession probabilities. Copyright © 2005 John Wiley & Sons, Ltd.

Suggested Citation

  • Marcelle Chauvet & Simon Potter, 2005. "Forecasting recessions using the yield curve," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 24(2), pages 77-103.
    • Handle: RePEc:jof:jforec:v:24:y:2005:i:2:p:77-103
    DOI: 10.1002/for.932
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