DP10815 Predictable Recoveries

Author(s): Xiaoming Cai, Wouter Den Haan, Jonathan Pinder
Publication Date: September 2015
Keyword(s): business cycles, forecasting, unit root
JEL(s): C53, E32, E37
Programme Areas: Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=10815

Should an unexpected change in real GNP of x% lead to an x% change in the forecasts of future GNP? The answer could be no even if GNP is a random walk. We show that US economic downturns often go together with predictable short-term recoveries and with changes in long-term GNP forecasts that are substantially smaller than the initial drop. But not always! Essential for our results is that GNP forecasts are not based on a univariate time series model, which is not uncommon. Our alternative forecasts are based on a simple multivariate representation of GNP?s expenditure components.