Template-Type: ReDIF-Paper 1.0
Author-Name: Claudio Borio
Author-X-Name-First: Claudio 
Author-X-Name-Last: Borio
Author-Name: Mathias Drehmann  
Author-X-Name-First: Mathias 
Author-X-Name-Last: Drehmann  
Author-Name: Dora Xia
Author-X-Name_First: Dora 
Author-X-Name-Last: Xia
Title: Predicting recessions: financial cycle versus term spread
Abstract: 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.
Length: 29 pages
Creation-Date: 2019-10
File-URL: https://www.bis.org/publ/work818.pdf
File-Format: Application/pdf
File-Function: Full PDF document
File-URL: https://www.bis.org/publ/work818.htm
File-Format: text/html
Number: 818
Classification-JEL: C33, E37, E44
Keywords: financial cycle, term spread, recession risk, panel probit mode
Handle: RePEc:bis:biswps:818