Predicting recoveries and the importance of using enough information

Wouter Den Haan and Xiaoming Cai
Authors registered in the RePEc Author Service: Wouter Denhaan ()

No 7508, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Several papers that make forecasts about the long-term impact of the current financial crisis rely on models in which there is only one type of financial crisis. These models tend to predict that the current crisis will have long lasting negative effects on economic growth. This paper points out the deficiency in this approach by analyzing the ability of "one-type-shock" models to correctly forecast the recovery from past economic downturns. It is shown that these models often overestimate the long-run impact of recessions and that slightly richer models that allow the effects of recessions to be both persistent and transitory predict recoveries much better.

Keywords: Financial crisis; Forecasting; Great recession; Unit root (search for similar items in EconPapers)
JEL-codes: C51 C53 E37 (search for similar items in EconPapers)
Date: 2009-10
New Economics Papers: this item is included in nep-cba, nep-fdg and nep-for
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (24)

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