Economic activity and recession probabilities: Information content and predictive power of the term spread in Italy

The aim of the present article is to examine the information content of the Italian term spread as for real economic growth rates and recessionprobabilities and to test its predictive power in forecasting regimeprobabilities. To this end the relationship between the term spread andeconomic growth rates is modelled as a nonlinear one and specifically the Logistic Smooth Transition model is used, while a probit model isimplemented to forecast recession probabilities. Specific to this article isthe use of the OECD business cycle chronology, which was never usedbefore to this end for the Italian case. Overall evidence supports theinformative content of the spread in Italy over the whole period (1984–2005) although results are more satisfactory as from 1992. In particular, recession forecasts are generally better than those obtained with other chronologies previously adopted for the Italian case (ISAE and ECRI).