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What is the Probability of a Recession in the United States

Ekeblom, Daniel (2006)
Department of Economics
Abstract
The goal of this thesis is to answer the question what is the probability that the U.S. economy will experience a recession and a concomitant financial crisis in the near future. The question is answered through the use of a probit model, in which five explanatory variables, derived from previous research, are processed. The variables are Current Account to GDP, NYSE Composite Index, Domestic Credit, Domestic Investments, and the Yield Interest Rate Spread, where the three latter variables turn out to be statistically significant. The assumptions of heteroskedasticity and of normality are tested for in the model and cannot be rejected at any conventional level of significance. The final model is fairly theory consistent. The future... (More)
The goal of this thesis is to answer the question what is the probability that the U.S. economy will experience a recession and a concomitant financial crisis in the near future. The question is answered through the use of a probit model, in which five explanatory variables, derived from previous research, are processed. The variables are Current Account to GDP, NYSE Composite Index, Domestic Credit, Domestic Investments, and the Yield Interest Rate Spread, where the three latter variables turn out to be statistically significant. The assumptions of heteroskedasticity and of normality are tested for in the model and cannot be rejected at any conventional level of significance. The final model is fairly theory consistent. The future probability of a recession is explored in three different scenarios, which comprise a partial analysis, a parallel to the 1987 Current Account reversal and a speculative future scenario with heavy inflationary pressures. The main conclusion is that the U.S. economy has begun some sort of adaptation to lower expectations of future real growth although it cannot be concluded that there exists an impending threat of recession. In fact, the economy appears surprisingly stable although the influence of foreign factors on the domestic probability of a recession cannot be estimated within the elaborated framework. The probability of a future financial crisis cannot be predicted based on the available theory and accessible data, nor can the point in time of a recession be determined. (Less)
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@misc{1337969,
  abstract     = {The goal of this thesis is to answer the question what is the probability that the U.S. economy will experience a recession and a concomitant financial crisis in the near future. The question is answered through the use of a probit model, in which five explanatory variables, derived from previous research, are processed. The variables are Current Account to GDP, NYSE Composite Index, Domestic Credit, Domestic Investments, and the Yield Interest Rate Spread, where the three latter variables turn out to be statistically significant. The assumptions of heteroskedasticity and of normality are tested for in the model and cannot be rejected at any conventional level of significance. The final model is fairly theory consistent. The future probability of a recession is explored in three different scenarios, which comprise a partial analysis, a parallel to the 1987 Current Account reversal and a speculative future scenario with heavy inflationary pressures. The main conclusion is that the U.S. economy has begun some sort of adaptation to lower expectations of future real growth although it cannot be concluded that there exists an impending threat of recession. In fact, the economy appears surprisingly stable although the influence of foreign factors on the domestic probability of a recession cannot be estimated within the elaborated framework. The probability of a future financial crisis cannot be predicted based on the available theory and accessible data, nor can the point in time of a recession be determined.},
  author       = {Ekeblom, Daniel},
  keyword      = {forecasting,United States,Current Account reversal,Probit,U.S. recession,Economics, econometrics, economic theory, economic systems, economic policy,Nationalekonomi, ekonometri, ekonomisk teori, ekonomiska system, ekonomisk politik},
  language     = {eng},
  note         = {Student Paper},
  title        = {What is the Probability of a Recession in the United States},
  year         = {2006},
}