The 2001 US recession: what did recession prediction models tell us?
BIS Working Papers
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No
148
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01 March 2004
How predictable was the recent US recession? This paper evaluates the accuracy
of several recession prediction models. In particular, traditional rule-of-thumb
models using the composite index of leading indicators (CLI), Neftçi's
sequential probability model, a probit model, and Stock and Watson's
experimental recession indexes are compared. Despite the relatively mild depth
of the recession, the models using the CLI performed particularly well. The
results are robust across different types of models and with respect to the use
of real-time data. The strong real-time performance stands at odds with earlier
sceptical claims about the marginal usefulness of the CLI in predicting cyclical
turning points, and complements the results in the earlier research of Filardo
(1999). At a more conceptual level, the paper provides general support to the
classical business cycle view that turning points of business cycles from
expansion to recession are complex, possibly endogenous and nonlinear,
phenomena. The results also suggest that the impressive insights of Geoffrey
Moore into the theory and construction of the CLI will continue to shape our
understanding of business cycles well into the future.