engleski

Early Warning Signals of Recessions: Foreign vs. Domestic

The paper examines whether certain macrofinancial indicators can be used for early detection of recessions. Analysing a sample of small open post- transition economies of the European Union, we first identify the most important indicators used for early detection of recessions, and then test the validity of the selection by using the signal method and multivariate probit regressions. Our results imply that the most effective predictors of upcoming recessions are the slope of the yield curve, current account balance to GDP ratio, real estate price index, self-financing ratio of commercial banks, nominal effective exchange rate, global exports and LIBOR rate. Using the Mann- Whitney U Test, we also find that foreign indicators emit earlier signals of incoming recessions in analysed countries than domestic ones. Early warning of an impending recession allows economic policy makers to take corrective action to avoid a recession or to significantly mitigate its effects, while unreliable indicators may lead to adoption of unnecessary measures with adverse effects on the economy.

business cycles ; Mann-Whitney U Test ; recessions ; signal method

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