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Forecasting recessions using stall speeds

  • Jeremy J. Nalewaik
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    This paper presents evidence that the economic stall speed concept has some empirical content, and can be moderately useful in forecasting recessions. Specifically, output tends to transition to a slow-growth phase at the end of expansions before falling into a recession, and the paper designs Markov-switching models that behave in that way. While the switching models using output growth alone produce a considerable number of false positive recession signals, adding the slope of the yield curve, the percent change in housing starts, and the change in the unemployment rate to the model reduces false positives and improves recession forecasting. The switching model is particularly good at forecasting at long horizons, outperforming Blue Chip consensus forecasts.

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    File URL: http://www.federalreserve.gov/pubs/feds/2011/201124/201124abs.html
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    File URL: http://www.federalreserve.gov/pubs/feds/2011/201124/201124pap.pdf
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    Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2011-24.

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    Date of creation: 2011
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    Handle: RePEc:fip:fedgfe:2011-24
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    1. Marcelle Chauvet & Simon Potter, 2001. "Forecasting recessions using the yield curve," Staff Reports 134, Federal Reserve Bank of New York.
    2. Daniel E. Sichel, 1992. "Inventories and the three phases of the business cycle," Working Paper Series / Economic Activity Section 128, Board of Governors of the Federal Reserve System (U.S.).
    3. Kim, C-J & Nelson, C-R, 1997. "Friedman's Plucking Model of Business Fluctuations : Tests and Estimates of Permanent and Transitory Components," Discussion Papers in Economics at the University of Washington 97-06, Department of Economics at the University of Washington.
    4. Dennis J. Fixler & Jeremy Nalewaik, 2010. "News, Noise, and Estimates of the "True" Unobserved State of the Economy," BEA Working Papers 0068, Bureau of Economic Analysis.
    5. Hamilton, James D., 2011. "Calling recessions in real time," International Journal of Forecasting, Elsevier, vol. 27(4), pages 1006-1026, October.
    6. Arturo Estrella & Frederic S. Mishkin, 1996. "Predicting U.S. recessions: financial variables as leading indicators," Research Paper 9609, Federal Reserve Bank of New York.
    7. Edward E. Leamer, 2007. "Housing IS the Business Cycle," NBER Working Papers 13428, National Bureau of Economic Research, Inc.
    8. Kim, C-J., 1991. "Dynamic Linear Models with Markov-Switching," Papers 91-8, York (Canada) - Department of Economics.
    9. Hamilton, James D., 1990. "Analysis of time series subject to changes in regime," Journal of Econometrics, Elsevier, vol. 45(1-2), pages 39-70.
    10. Heikki Kauppi & Pentti Saikkonen, 2008. "Predicting U.S. Recessions with Dynamic Binary Response Models," The Review of Economics and Statistics, MIT Press, vol. 90(4), pages 777-791, November.
    11. Marcelle Chauvet & James D. Hamilton, 2005. "Dating Business Cycle Turning Points," NBER Working Papers 11422, National Bureau of Economic Research, Inc.
    12. Thomas B. King & Andrew T. Levin & Roberto Perli, 2007. "Financial market perceptions of recession risk," Finance and Economics Discussion Series 2007-57, Board of Governors of the Federal Reserve System (U.S.).
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