Predicting Recoveries and the Importance of Using Enough Information

47 Pages Posted: 17 Nov 2009  

Xiaoming Cai

VU University Amsterdam - Department of Economics

Wouter J. den Haan

University of Amsterdam; Centre for Economic Policy Research (CEPR); Tinbergen Institute

Date Written: October 2009

Abstract

Several papers that make forecasts about the long-term impact of the current financial crisis rely on models in which there is only one type of financial crisis. These models tend to predict that the current crisis will have long lasting negative effects on economic growth. This paper points out the deficiency in this approach by analyzing the ability of "one-type-shock" models to correctly forecast the recovery from past economic downturns. It is shown that these models often overestimate the long-run impact of recessions and that slightly richer models that allow the effects of recessions to be both persistent and transitory predict recoveries much better.

Keywords: financial crisis, forecasting, great recession, unit root

JEL Classification: C51, C53, E37

Suggested Citation

Cai, Xiaoming and den Haan, Wouter J., Predicting Recoveries and the Importance of Using Enough Information (October 2009). CEPR Discussion Paper No. DP7508. Available at SSRN: https://ssrn.com/abstract=1507505

Xiaoming Cai (Contact Author)

VU University Amsterdam - Department of Economics ( email )

De Boelelaan 1105
1081 HV Amsterdam
Netherlands

Wouter J. Den Haan

University of Amsterdam ( email )

Spui 21
Amsterdam, 1018 WB
Netherlands

HOME PAGE: http://www1.feb.uva.nl/toe/content/people/content/denhaan/pers.htm

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

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