Structural Breaks and Non-Linearities for Predicting the Probability of US Recessions using the Spread

This paper proposes a structural break threshold model (SBT) to the dynamic relationship between US output growth and the spread between long- and short-term interest rates. This model is able to account for non-linearities, parameter changes and the reduction of the variability of output growth. The SBT model gives better in-sample predictions of the probability of US recessions during 1955-1999 than models with only non-linearity or structural breaks. The presence of a structural break affects the timing and the size of predictions of the probability of recession for 2001.