Working Paper: CEPR ID: DP13626
Authors: Franck Portier; Paul Beaudry
Abstract: It is commonly accepted that economic expansions do not exhibit duration dependence, that is, the probability of an expansion terminating in the near future is thought to be independent of the length of the expansion. Our main focus is on determining the probability of the US economy entering a recession in the following year (or following two years) conditional on the expansion having lasted q quarters. When looking at the probability of entering a recession within a year (or 2 years), we find considerable evidence of economically significant duration dependence, especially when adopting a non-parametric approach. For example, for an expansion that has lasted only 5 quarters, the probability of entering a recession in the next year is around 10%, while this increases to 30-40% if the expansion has lasted over 35 quarters. Similarly, if looking at a two years window, we find the probability of entering a recession in the next two years raises from 25-30% to around 50-80% as the expansion extends from 5 quarters to 32 quarters. This pattern suggests that certain types of macroeconomic vulnerabilities may be accumulating as the expansion ages causing the arrival of a recession to become more likely. Our non-parametric estimates suggest that this later pattern is especially important once a recession has lasted more than 6 years.
Keywords: recessions; business cycles
JEL Codes: E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Duration of US economic expansions (N12) | Probability of entering a recession (E32) |
| Age of the expansion (N13) | Probability of entering a recession (E32) |
| Duration of US economic expansions (N12) | Accumulation of macroeconomic vulnerabilities (F65) |
| Duration of US economic expansions (N12) | Recession probability after 6 years (E37) |