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Recession probabilities for the Eurozone at the zero lower bound

  • This paper examines the recession probabilities for the Eurozone along four different dimensions: First, we identify the best performing indicators for a recession within the next 12 months based on 43 underlying single variables and their different transformations in a benchmark model. We find that a modified version of the yield curve incorporating the shadow interest rate removes the downward rigidity of the front-leg and restores part of the informational content of the term spread at the zero lower bound. However, the best performing single indicator of the benchmark model is Real M1 followed by the Purchasing Managers Index (PMI), the investment grade corporate bond spread and the Terms of Trade. Second, the paper establishes three submodels to increase the lead-time and the stability of recession models: (i) Monetary transmission channels via principal component analysis; (ii) Bivariate regressions to identify paramount combinations; (iii) Unstable surges vis-à-vis the Hodrick-Prescott trend to detect animal spirits and hawkish mistakes. Third, the analysis is extended over various forecasting horizons (6m, 18m and 24m). Fourth, the results are analyzed from the perspective of risk-affine and risk-averse investors.

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Metadaten
Author:Ralf Fendel, Nicola Mai, Oliver Mohr
URN:urn:nbn:de:hbz:992-opus4-7015
Subtitle (English):challenges to the term spread and rise of alternatives
Series (Serial Number):WHU – Working Paper Series in Economics (WP 18/04)
Publisher:WHU - Otto Beisheim School of Management
Place of publication:Vallendar
Document Type:Working Paper
Language:English
Date of Publication (online):2018/07/14
Date of first Publication:2018/07/14
Release Date:2018/07/14
Tag:Europäische Zentralbank; Monetärer Übertragungskanal; Nullzinsgrenze; Rezession; Vitalität; Wahrscheinlichkeit; Zinsdifferenz
Animal spirits; European Central Bank; Monetary transmission channel; Probability; Recession; Term spread; Zero lower bound
Page Number:40
Institutes:WHU Economics Group / Chair of Monetary Economics
JEL-Classification:E Macroeconomics and Monetary Economics / E3 Prices, Business Fluctuations, and Cycles
E Macroeconomics and Monetary Economics / E3 Prices, Business Fluctuations, and Cycles / E32 Business Fluctuations; Cycles
E Macroeconomics and Monetary Economics / E3 Prices, Business Fluctuations, and Cycles / E37 Forecasting and Simulation
E Macroeconomics and Monetary Economics / E5 Monetary Policy, Central Banking, and the Supply of Money and Credit
E Macroeconomics and Monetary Economics / E5 Monetary Policy, Central Banking, and the Supply of Money and Credit / E52 Monetary Policy
Licence (German):Copyright for this publication