Similarity-Based Recession Prediction in Different Interest Rate Environments

51 Pages Posted: 25 Jul 2022 Last revised: 1 Nov 2022

See all articles by Visa Kuntze

Visa Kuntze

University of Turku

Henri Nyberg

University of Turku

Samuel Rauhala

University of Turku

Date Written: October 20, 2022

Abstract

We develop a flexible nonparametric similarity-based approach to predict the state of the business cycle in different interest rate environments. Our approach provides methodological advantages over parametric logit and probit models and new empirical perspectives on the usefulness of the term spread as the main leading indicator and its connection to the prevailing interest rate level. Empirical results on the U.S., euro area and Japan show that the predictability of business cycle regimes depends on not just the term spread but also monetary policy conditions measured by the level of the short-term interest rate.

Keywords: Nonparametrics, yield curve, term spread, interest rates

JEL Classification: C14, C25, C53, E32, E43

Suggested Citation

Kuntze, Visa and Nyberg, Henri and Rauhala, Samuel, Similarity-Based Recession Prediction in Different Interest Rate Environments (October 20, 2022). Available at SSRN: https://ssrn.com/abstract=4163483 or http://dx.doi.org/10.2139/ssrn.4163483

Visa Kuntze (Contact Author)

University of Turku ( email )

Turku, FIN-20014
Finland

Henri Nyberg

University of Turku ( email )

Turku, 20014
Finland

Samuel Rauhala

University of Turku ( email )

Turku, 20014
Finland

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