Forecasting US Recessions: The Role of Economic Uncertainty
20 Pages Posted: 13 Oct 2020
Date Written: September 29, 2020
This paper highlights the role of macroeconomic and financial uncertainty in predicting US recessions. In-sample forecasts using probit models indicate that these two variables are the best predictors of recessions at short horizons. Macroeconomic uncertainty has the highest predictive power up to 7 months ahead and becomes the second best predictor --- after the yield curve slope --- at longer horizons. Using data up to end-2018, out-of-sample forecasts show that uncertainty contributed significantly to lowering the probability of a recession in 2019, which indeed did not occur.
Keywords: macroeconomic and financial uncertainty, yield curve slope, recession, probit forecasting model
JEL Classification: D81, E32, E37, E44
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