Forecasting Recessions Using the Yield Curve

FRB of New York Staff Report No. 134

University of California Working Paper Series

33 Pages Posted: 30 Jun 2001

See all articles by Marcelle Chauvet

Marcelle Chauvet

University of California Riverside

Simon Potter

Federal Reserve Bank of New York

Date Written: June 2001

Abstract

We compare forecasts of recessions using four different specifications of the probit model: a time invariant conditionally independent version; a business cycle specific conditionally independent model; a time invariant probit with autocorrelated errors; and a business cycle specific probit with autocorrelated errors.

The more sophisticated versions of the model take into account some of the potential underlying causes of the documented predictive instability of the yield curve. We find strong evidence in favor of the more sophisticated specification, which allows for multiple break-points across business cycles and autocorrelation. We also develop a new approach to the construction of real time forecasting of recession probabilities.

Keywords: Recession Forecast, Yield Curve, Structural Breaks, Bayesian, Classical Methods

JEL Classification: C2, C11, C53, E3, E4, E52

Suggested Citation

Chauvet, Marcelle and Potter, Simon, Forecasting Recessions Using the Yield Curve (June 2001). FRB of New York Staff Report No. 134; University of California Working Paper Series. Available at SSRN: https://ssrn.com/abstract=274202 or http://dx.doi.org/10.2139/ssrn.274202

Marcelle Chauvet

University of California Riverside ( email )

900 University Avenue
4136 Sproul Hall
Riverside, CA 92521
United States
(951) 827-1587 (Phone)

HOME PAGE: http://https://sites.google.com/site/marcellechauvet/

Simon Potter (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States
212-720-6309 (Phone)
212-720-1844 (Fax)

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