Forecasting US Recessions: The Role of Economic Uncertainty

20 Pages Posted: 13 Oct 2020

Date Written: September 29, 2020

Abstract

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

Suggested Citation

Ercolani, Valerio and Natoli, Filippo, Forecasting US Recessions: The Role of Economic Uncertainty (September 29, 2020). Bank of Italy Temi di Discussione (Working Paper) No. 1299, Available at SSRN: https://ssrn.com/abstract=3710134 or http://dx.doi.org/10.2139/ssrn.3710134

Valerio Ercolani (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Filippo Natoli

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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