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Predicting Canadian Recessions Using Financial Variables: A Probit Approach

  • Atta-Mensah, Joseph
  • Tkacz, Greg

This paper examines the ability of a number of financial variables to predict Canadian recessions. Regarding methodology, we follow closely the technique employed by Estrella and Mishkin (1998), who use a probit model to predict U.S. recessions up to eight quarters in advance. Our main finding is that the spread between the yield on Canadian long bonds and the 90-day commercial paper rate is particularly useful in predicting Canadian recessions. This result is consistent with those of Estrella and Mishkin (1998).

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Paper provided by Bank of Canada in its series Working Papers with number 98-5.

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Length: 38 pages
Date of creation: 1998
Date of revision:
Handle: RePEc:bca:bocawp:98-5
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  1. Jeffrey A. Frankel & Cara S. Lown, 1991. "An indicator of future inflation extracted from the steepness of the interest rate yield curve along its entire length," Research Paper 9122, Federal Reserve Bank of New York.
  2. Estrella, Arturo & Hardouvelis, Gikas A, 1991. " The Term Structure as a Predictor of Real Economic Activity," Journal of Finance, American Finance Association, vol. 46(2), pages 555-76, June.
  3. Jim Day & Ron Lange, 1997. "The Structure of Interest Rates in Canada: Information Content about Medium-Term Inflation," Working Papers 97-10, Bank of Canada.
  4. Barry Cozier & Greg Tkacz, 1994. "The Term Structure and Real Activity in Canada," Macroeconomics 9406001, EconWPA, revised 23 Jun 1994.
  5. Stock, J.H. & Watson, M.W., 1989. "New Indexes Of Coincident And Leading Economic Indicators," Papers 178d, Harvard - J.F. Kennedy School of Government.
  6. Bernard, Henri J & Gerlach, Stefan, 1998. "Does the Term Structure Predict Recessions? The International Evidence," CEPR Discussion Papers 1892, C.E.P.R. Discussion Papers.
  7. Tiff Macklem & Alain Paquet & Louis Phaneuf, 1996. "Asymmetric Effects of Monetary Policy: Evidence from the Yield Curve," Cahiers de recherche CREFE / CREFE Working Papers 42, CREFE, Université du Québec à Montréal.
  8. W. A. Beckett, 1961. "Indicators of Cyclical Recessions and Revivals in Canada," NBER Chapters, in: Business Cycle Indicators, Volume 1, pages 294-324 National Bureau of Economic Research, Inc.
  9. Geoffrey H. Moore, 1961. "Leading and Confirming Indicators of General Business Changes," NBER Chapters, in: Business Cycle Indicators, Volume 1, pages 45-109 National Bureau of Economic Research, Inc.
  10. Campbell R. Harvey, 1997. "The Relation between the Term Structure of Interest Rates and Canadian Economic Growth," Canadian Journal of Economics, Canadian Economics Association, vol. 30(1), pages 169-93, February.
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