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Forecasting the state of the Finnish business cycle

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  • Pönkä, Harri
  • Stenborg, Markku

Abstract

We employ probit models to study the predictability of recession periods in Finland using a set of commonly used variables based on previous literature. The findings point out that individual predictors, including the term spread and the real housing prices from the capital area, are useful predictors of recession periods. However, the best in-sample fit is found using combinations of variables. The pseudo out-of-sample forecasting results are generally in line with the in-sample results, and suggest that in the one-quarter ahead forecasts a model combining the term spread, the unemployment expectation component of the consumer confidence index, and the consumer confidence index performs the best based on the area under the receiver operating characteristic curve. An autoregressive specification improves the in-sample fit of the models compared to the static probit model, but findings from pseudo out-of-sample forecasts vary between forecasting horizons.

Suggested Citation

  • Pönkä, Harri & Stenborg, Markku, 2018. "Forecasting the state of the Finnish business cycle," MPRA Paper 91226, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:91226
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    References listed on IDEAS

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    Cited by:

    1. Nissilä, Wilma, 2020. "Probit based time series models in recession forecasting – A survey with an empirical illustration for Finland," BoF Economics Review 7/2020, Bank of Finland.

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    More about this item

    Keywords

    Business cycle; Recession period; Probit model;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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