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Predicting recessions with leading indicators: model averaging and selection over the business cycle

  • Travis Berge

This paper evaluates the ability of several commonly followed economic indicators to predict business cycle turning points. As a baseline, forecasts from univariate models are combined by taking averages or by weighting forecasts with model-implied posterior probabilities. These combined forecasts are compared to those from a sophisticated model selection algorithm that allows for nonlinear model speci_cations. The preferred forecasting model is one that allows for nonlinear behavior across the business cycle and combines information from the yield curve with other indicators, especially at very short and very long horizons.

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Paper provided by Federal Reserve Bank of Kansas City in its series Research Working Paper with number RWP 13-05.

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Date of creation: 2013
Date of revision:
Handle: RePEc:fip:fedkrw:rwp13-05
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  1. Mark W. Watson & James H. Stock, 2004. "Combination forecasts of output growth in a seven-country data set," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 23(6), pages 405-430.
  2. Raffaella Giacomini & Halbert White, 2003. "Tests of Conditional Predictive Ability," Econometrics 0308001, EconWPA.
  3. Marcelle Chauvet & Zeynep Senyuz, 2012. "A dynamic factor model of the yield curve as a predictor of the economy," Finance and Economics Discussion Series 2012-32, Board of Governors of the Federal Reserve System (U.S.).
  4. William Brock & Steven Durlauf & Kenneth West, 2005. "Model uncertainty and policy evaluation: some theory and empirics," Proceedings, Federal Reserve Bank of San Francisco.
  5. Jonathan H. Wright, 2006. "The yield curve and predicting recessions," Finance and Economics Discussion Series 2006-07, Board of Governors of the Federal Reserve System (U.S.).
  6. Glenn D. Rudebusch & John C. Williams, 2007. "Forecasting recessions: the puzzle of the enduring power of the yield curve," Working Paper Series 2007-16, Federal Reserve Bank of San Francisco.
  7. Estrella, Arturo, 1998. "A New Measure of Fit for Equations with Dichotomous Dependent Variables," Journal of Business & Economic Statistics, American Statistical Association, vol. 16(2), pages 198-205, April.
  8. Gernot Doppelhofer & Ronald I. Miller & Xavier Sala-i-Martin, 2000. "Determinants of Long-Term Growth: A Bayesian Averaging of Classical Estimates (Bace) Approach," OECD Economics Department Working Papers 266, OECD Publishing.
  9. Marcelle Chauvet & Simon Potter, 2001. "Forecasting recessions using the yield curve," Staff Reports 134, Federal Reserve Bank of New York.
  10. Elliott, Graham & Lieli, Robert P., 2013. "Predicting binary outcomes," Journal of Econometrics, Elsevier, vol. 174(1), pages 15-26.
  11. Michael Dueker, 2005. "Dynamic Forecasts of Qualitative Variables: A Qual VAR Model of U.S. Recessions," Journal of Business & Economic Statistics, American Statistical Association, vol. 23, pages 96-104, January.
  12. David Hendry & Michael P. Clements, 2001. "Pooling of Forecasts," Economics Papers 2002-W9, Economics Group, Nuffield College, University of Oxford.
  13. Marco Aiolfi & Carlos Capistrán & Allan Timmermann, 2010. "Forecast Combinations," Working Papers 2010-04, Banco de México.
  14. repec:ecl:ucdeco:09-18 is not listed on IDEAS
  15. James Morley & Jeremy Piger, 2012. "The Asymmetric Business Cycle," The Review of Economics and Statistics, MIT Press, vol. 94(1), pages 208-221, February.
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