Authors: Christophe Bellégo; Laurent Ferrara
Addresses: INSEE-CREST, Malakoff, 92240, France ' Banque de France, International Macroeconomics Division, Paris, 75001, France
Abstract: The last two macroeconomic recessions in the euro area in 2008-2009 and 2011-2013 have pointed out the impact of financial markets on economic activity. In this paper, we propose to evaluate the ability of a set of financial variables to forecast recessions in the euro area by using binary response models associated with information combination. For various forecast horizons, we provide a readable and leading signal of recession by combining information according to two combining schemes. First we average recession probabilities and second we linearly combine variables through a factor model in order to estimate an innovative Factor-Augmented probit model. Out-of-sample results over the periods 2007-2009 and 2011-2013 show that financial variables would have been helpful in giving accurate and timely recession signals in real-time.
Keywords: macroeconomic forecasting; recession forecasts; financial markets; euro area recessions; financial information; financial variables.
International Journal of Computational Economics and Econometrics, 2017 Vol.7 No.1/2, pp.78 - 94
Received: 17 Oct 2014
Accepted: 03 Jun 2015
Published online: 12 Oct 2016 *