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Structural break threshold VARs for predicting US recessions using the spread

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  • Ana Beatriz C. Galvão

Abstract

This paper proposes a model to predict recessions that accounts for non‐linearity and a structural break when the spread between long‐ and short‐term interest rates is the leading indicator. Estimation and model selection procedures allow us to estimate and identify time‐varying non‐linearity in a VAR. The structural break threshold VAR (SBTVAR) predicts better the timing of recessions than models with constant threshold or with only a break. Using real‐time data, the SBTVAR with spread as leading indicator is able to anticipate correctly the timing of the 2001 recession. Copyright © 2006 John Wiley & Sons, Ltd.

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  • Ana Beatriz C. Galvão, 2006. "Structural break threshold VARs for predicting US recessions using the spread," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 21(4), pages 463-487, May.
    • Handle: RePEc:wly:japmet:v:21:y:2006:i:4:p:463-487
    DOI: 10.1002/jae.840
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