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Predicting U.S. Recessions: Financial Variables as Leading Indicators

  • Arturo Estrella
  • Frederic S. Mishkin

This article examines the performance of various financial variables as predictors of subsequent U.S. recessions. Series such as interest rates and spreads, stock prices, currencies, and monetary aggregates are evaluated singly and in comparison with other financial and non-financial indicators. The analysis focuses on out-of-sample performance from 1 to 8 quarters ahead. Results show that stock prices are useful with 1-2 quarter horizons, as are some well-known macroeconomic indicators. Beyond 2 quarters, the slope of the yield curve emerges as the clear choice, and typically performs better by itself out of sample than in conjunction with other variables.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5379.

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Date of creation: Dec 1995
Date of revision:
Publication status: published as Review of Economics and Statistics, vol.80, no.1, pp. 45-61, February 1998.
Handle: RePEc:nbr:nberwo:5379
Note: EFG ME
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  1. Frederic S. Mishkin, 1989. "A Multi-Country Study of the Information in the Term Structure about Future Inflation," NBER Working Papers 3125, National Bureau of Economic Research, Inc.
  2. Jorion, Philippe & Mishkin, Frederic, 1991. "A multicountry comparison of term-structure forecasts at long horizons," Journal of Financial Economics, Elsevier, vol. 29(1), pages 59-80, March.
  3. James H. Stock & Mark W. Watson, 1989. "New Indexes of Coincident and Leading Economic Indicators," NBER Chapters, in: NBER Macroeconomics Annual 1989, Volume 4, pages 351-409 National Bureau of Economic Research, Inc.
  4. Mark W. Watson, 1991. "Using econometric models to predict recessions," Economic Perspectives, Federal Reserve Bank of Chicago, issue Nov, pages 14-25.
  5. Arturo Estrella & Gikas A. Hardouvelis, 1989. "The term structure as a predictor of real economic activity," Research Paper 8907, Federal Reserve Bank of New York.
  6. repec:pal:imfstp:v:40:y:1993:i:4:p:781-806 is not listed on IDEAS
  7. Arturo Estrella & Frederic S. Mishkin, 1995. "The term structure of interest rates and its role in monetary policy for the European Central Bank," Research Paper 9526, Federal Reserve Bank of New York.
  8. James H. Stock & Mark W. Watson, 1992. "A procedure for predicting recessions with leading indicators: econometric issues and recent performance," Working Paper Series, Macroeconomic Issues 92-7, Federal Reserve Bank of Chicago.
  9. Robert D. Laurent, 1989. "Testing the "spread"," Economic Perspectives, Federal Reserve Bank of Chicago, issue Jul, pages 22-34.
  10. Boldin, Michael D, 1994. "Dating Turning Points in the Business Cycle," The Journal of Business, University of Chicago Press, vol. 67(1), pages 97-131, January.
  11. Reinhart, Carmen & Reinhart, Vincent, 1996. "Forecasting turning points in Canada," MPRA Paper 13884, University Library of Munich, Germany.
  12. Chen, Nai-Fu, 1991. " Financial Investment Opportunities and the Macroeconomy," Journal of Finance, American Finance Association, vol. 46(2), pages 529-54, June.
  13. Fernando Barran & Virginie Coudert & BenoƮt Mojon, 1995. "Interest Rates, Banking Spreads and Credit Supply: The Real Effects," Working Papers 1995-01, CEPII research center.
  14. Harvey, Campbell R., 1988. "The real term structure and consumption growth," Journal of Financial Economics, Elsevier, vol. 22(2), pages 305-333, December.
  15. Plosser, Charles I. & Geert Rouwenhorst, K., 1994. "International term structures and real economic growth," Journal of Monetary Economics, Elsevier, vol. 33(1), pages 133-155, February.
  16. Mishkin, F.S., 1988. "What Does The Term Structure Tell Us About Future Inflation?," Papers fb-_88-29, Columbia - Graduate School of Business.
  17. Frederic S. Mishkin, 1990. "The Information in the Longer Maturity Term Structure about Future Inflation," The Quarterly Journal of Economics, Oxford University Press, vol. 105(3), pages 815-828.
  18. repec:pal:imfstp:v:41:y:1994:i:3:p:517-525 is not listed on IDEAS
  19. Robert D. Laurent, 1988. "An interest rate-based indicator of monetary policy," Economic Perspectives, Federal Reserve Bank of Chicago, issue Jan, pages 3-14.
  20. Zuliu Hu, 1993. "The Yield Curve and Real Activity," IMF Working Papers 93/19, International Monetary Fund.
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