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Predicting Recessions in the Euro Area: A Factor Approach

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Listed:
  • Goodhead, Robert

    (Central Bank of Ireland)

  • Parle, Conor

    (Central Bank of Ireland)

Abstract

Recent economic data have pointed to the potential for weaker economic growth in the euro area. This Letter presents a model of recession probabilities using the first five principal components of a range of macroeconomic, financial and global variables as predictors. This model outperforms a yield curve based method, and points to slightly elevated recession risk in the near term.

Suggested Citation

  • Goodhead, Robert & Parle, Conor, 2019. "Predicting Recessions in the Euro Area: A Factor Approach," Economic Letters 2/EL/19, Central Bank of Ireland.
    • Handle: RePEc:cbi:ecolet:2/el/19
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    File URL: https://centralbank.ie/docs/default-source/publications/economic-letters/vol-2019-no-2-predicting-recessions-in-the-euro-area-a-factor-approach-(goodhead-and-parle).pdf?sfvrsn=5
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    References listed on IDEAS

    as
    1. Ralf Fendel & Nicola Mai & Oliver Mohr, 2018. "Recession Probabilities for the Eurozone at the Zero Lower Bound: Challenges to the Term Spread and Rise of Alternatives," WHU Working Paper Series - Economics Group 18-04, WHU - Otto Beisheim School of Management.
    2. Fagan, Gabriel & Henry, Jérôme & Mestre, Ricardo, 2001. "An area-wide model (AWM) for the euro area," Working Paper Series 42, European Central Bank.
    3. Arturo Estrella & Frederic S. Mishkin, 1996. "The yield curve as a predictor of U.S. recessions," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 2(Jun).
    4. Favero, Carlo A. & Söderström, Ulf & Kaminska, Iryna, 2005. "The Predictive Power of the Yield Spread: Further Evidence and A Structural Interpretation," CEPR Discussion Papers 4910, C.E.P.R. Discussion Papers.
    5. Liu, Weiling & Moench, Emanuel, 2016. "What predicts US recessions?," International Journal of Forecasting, Elsevier, vol. 32(4), pages 1138-1150.
    6. Conefrey, Thomas & Walsh, Graeme, 2018. "A Monthly Indicator of Economic Activity for Ireland," Economic Letters 14/EL/18, Central Bank of Ireland.
    7. Bellégo, C. & Ferrara, L., 2009. "Forecasting Euro-area recessions using time-varying binary response models for financial," Working papers 259, Banque de France.
    8. Peter Johansson & Andrew C. Meldrum, 2018. "Predicting Recession Probabilities Using the Slope of the Yield Curve," FEDS Notes 2018-03-01-3, Board of Governors of the Federal Reserve System (U.S.).
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    Cited by:

    1. Byrne, David & Zekaite, Zivile, 2019. "Euro area longer-term inflation expectations revisited," Economic Letters 12/EL/19, Central Bank of Ireland.

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