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Examining Predictors of U.S. Recessions: A Regime-Switching Approach

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  • Ralf Ahrens

Abstract

This study uses univariate and bivariate regime-switching models to compare the predictive performance of five popular business cycle indicators. The empirical results suggest that all considered series are sensibly modelled as following a two-state regimeswitching process. For each variable one regime more or less strongly indicates recession periods, while the other one is associated with phases of economic recovery or expansion. The yield curve spread is confirmed to be the most reliable recession predictor with an average predictive lead time of three quarters. As the most important result, our simple univariate model turns out to be a filter that transforms accurately term spread changes into turning point predictions.

Suggested Citation

  • Ralf Ahrens, 1999. "Examining Predictors of U.S. Recessions: A Regime-Switching Approach," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 135(I), pages 97-124, March.
  • Handle: RePEc:ses:arsjes:1999-i-5
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    Cited by:

    1. Ivanova, Detelina & Lahiri, Kajal & Seitz, Franz, 2000. "Interest rate spreads as predictors of German inflation and business cycles," International Journal of Forecasting, Elsevier, vol. 16(1), pages 39-58.
    2. Fabio Moneta, 2005. "Does the Yield Spread Predict Recessions in the Euro Area?," International Finance, Wiley Blackwell, vol. 8(2), pages 263-301, August.

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