PREDICTING THE PROBABILITY OF A RECESSION WITH NONLINEAR AUTOREGRESSIVE LEADING-INDICATOR MODELS

Abstract

We develop nonlinear leading-indicator models for GDP growth, with the interest-rate spread and growth in M2 as leading indicators. Since policy makers typically are interested in whether 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.