Abstract
This study uses Markov-switching models to evaluate the informational content of the term structure as a predictor of recessions in eight OECD countries. The empirical results suggest that for all countries the term spread is sensibly modelled as a two-state regime-switching process. Moreover, a simple univariate model turns out to be a filter that transforms accurately term spread changes into turning point predictions. The term structure is confirmed to be a reliable recession indicator. However, the results of probit estimations show that on average the Markov-switching filter does not improve the forecasting ability of the spread.
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