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Do probit models help in forecasting turning points of German business cycles?

  • Ulrich Fritsche

    (German Institute for Economic Research)

In this paper we used a data set constructed for a companion paper (Fritsche/Stephan, 2000) where we explored the leading indicator properties of different time series for the German business cycle. Now we test for the ability of different indicator series to forecast recessions by using a probit approach as proposed by Estrella/Mishkin (1997). The dating procedure refers to the study by Artis et. al. (1997). We took into consideration the criticism made by Dueker (1997) who stated that in the probit model the fact that the economy is already in a state of recession must be controlled for. The results of our estimate are unsatisfactory on the whole. Only the ifo institute's business expectation of producers of intermediate inputs, the interest rate spread, the long-term interest rate, and money supply M2 show satisfactory leading properties.

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Paper provided by EconWPA in its series Macroeconomics with number 0012022.

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Length: 15 pages
Date of creation: 28 Feb 2001
Date of revision:
Handle: RePEc:wpa:wuwpma:0012022
Note: Type of Document - PDF; prepared on IBM PC; pages: 15 ; figures: included
Contact details of provider: Web page: http://econwpa.repec.org

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  1. Michael Dueker, 1997. "Strengthening the case for the yield curve as a predictor of U.S. recessions," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 41-51.
  2. Ulrich Fritsche & Sabine Stephan, 2000. "Leading Indicators of German Business Cycles: An Assessment of Properties," Discussion Papers of DIW Berlin 207, DIW Berlin, German Institute for Economic Research.
  3. Canova, Fabio, 1993. "Detrending and Business Cycle Facts," CEPR Discussion Papers 782, C.E.P.R. Discussion Papers.
  4. Henri Bernard & Stefan Gerlach, 1996. "Does the term structure predict recessions? The international evidence," BIS Working Papers 37, Bank for International Settlements.
  5. Artis, Michael J & Kontolemis, Zenon G & Osborn, Denise R, 1997. "Business Cycles for G7 and European Countries," The Journal of Business, University of Chicago Press, vol. 70(2), pages 249-79, April.
  6. Stock, J.H. & Watson, M.W., 1989. "New Indexes Of Coincident And Leading Economic Indicators," Papers 178d, Harvard - J.F. Kennedy School of Government.
  7. Jörg Döpke, 1999. "Predicting Germany's Recessions with Leading Indicators ; Evidence from Probit Models," Kiel Working Papers 944, Kiel Institute for the World Economy.
  8. Canova, Fabio, 1998. "Detrending and business cycle facts: A user's guide," Journal of Monetary Economics, Elsevier, vol. 41(3), pages 533-540, May.
  9. Arturo Estrella, 1997. "A new measure of fit for equations with dichotomous dependent variables," Research Paper 9716, Federal Reserve Bank of New York.
  10. Estrella, Arturo & Mishkin, Frederic S., 1997. "The predictive power of the term structure of interest rates in Europe and the United States: Implications for the European Central Bank," European Economic Review, Elsevier, vol. 41(7), pages 1375-1401, July.
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