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Structural Break Threshold VARs for Predicting US Recessions using the Spread
Código: WPE – 046
Ana Beatriz C. Galvão
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 to estimate and to identify timevarying 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.