Modern recession forecasting systems: The signals approach

Abstract

Global recession fears have been rising with the worldwide outbreak of the COVID-19 pandemic. Could we have predicted the outcomes of the events that led up to the current liquidity crisis? Could economic indicators potentially forecast recessions? If yes, what are those indicators, and how should average people interpret them? This work aims to create a crisis prediction model as an independent forecasting system for giving an estimation of the likelihood of a recession. To establish the connections between indicators of financial stability, we represent a literature review. Then the operability of these indicators and their updated thresholds are analyzed for the European market. To determine the effectiveness of the chosen indicators, we used the “Signals Approach” method. In the end, the results are presented and discussed. This article generally describes quantitative indicators. Further analysis is needed to make a conclusive statement about the economic condition.