Working Papers 2000 – Abstracts

3/2000

Predicting the Probability of a Recession with Nonlinear Autoregressive Leading Indicator Models

Heather M. Anderson and Farshid Vahid

We develop nonlinear leading indicator models for GDP growth, with the interest rate spread and growth in M2 as leading indicators. Since policy makers are typically interested in whether or not a recession is imminent, we evaluate these models according to their ability to predict the probability of a recession. Using data for the United States, we find that conditional on the spread, the marginal contribution of M2 growth in predicting recessions is negligible.

Keywords:  Event Probabilities, Leading Indicators, Nonlinear Models.

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