Staff Reports

Forecasting Recessions Using the Yield Curve

August 2001Number 134
JEL classification: C53, E52

Authors: Marcelle Chauvet and Simon Potter

We compare forecasts of recessions using four different specifications of the probit model: a time-invariant conditionally independent version, a business cycle specific conditionally independent model, a time-invariant probit with autocorrelated errors, and a business cycle specific probit with autocorrelated errors.

The more sophisticated versions of the model take into account some of the potential underlying causes of the documented predictive instability of the yield curve. We find strong evidence in favor of the more sophisticated specification, which allows for multiple breakpoints across business cycles and autocorrelation. We also develop a new approach to the construction of real time forecasting of recession probabilities.

Available only in PDFPDF33 pages / 344 kb

For a published version of this report, see Marcelle Chauvet and Simon Potter, "Predicting Recessions Using the Yield Curve," Journal of Forecasting 24, no. 2 (March 2005): 77-103.