Predicting Recessions: Financial Cycle versus Term Spread
29 Pages Posted: 14 Oct 2019
Date Written: October 11, 2019
Financial cycles can be important drivers of real activity, but there is scant evidence about how well they signal recession risks. We run a horse race between the term spread - the most widely used indicator in the literature - and a range of financial cycle measures. Unlike most papers, ours assesses forecasting performance not just for the United States but also for a panel of advanced and emerging market economies. We find that financial cycle measures have significant forecasting power both in and out of sample, even for a three-year horizon. Moreover, they outperform the term spread in nearly all specifications. These results are robust to different recession specifications.
Keywords: financial cycle, term spread, recession risk, panel probit mode
JEL Classification: C33, E37, E44
Suggested Citation: Suggested Citation