Forecasting recession: can we do better on

M acroeconomists spend much of their timedeveloping theories and building modelsto demonstrate how shocks propagate and affect the overall level of economic activity. Both policymakers and the private sector maintain a keen interest in understanding the state of busi-ness affairs and the most likely path the economy will take over a planning horizon. Although there are a number of economic events that concern the authorities—including excessive inflation and unemployment—considerable attention is paid to the forecasting of recession. If policymakers can anticipate a recession, they take preemptive cor-rective action. The private sector uses this infor-mation to shelter itself from the vagaries of the business cycle and the most likely reaction of policymakers. Recently a number of studies have examined the ability of financial variables to forecast reces-sions. Many analysts find that financial indicators contain information that can be used to increase forecast accuracy. Estrella and Mishkin (1998) found that the slope of the yield curve helped pre-dict recessions beyond one quarter. Haubrich an