Review article

https://doi.org/10.18045/zbefri.2016.2.555

Predicting the probability of recession in Croatia:Is economic sentiment the missing link?

Nataša Erjavec orcid.org/0000-0002-0943-2198 ; Faculty of Economics and Business, University of Zagreb, Zagreb, Croatia
Petar Sorić orcid.org/0000-0002-6773-264X ; Faculty of Economics and Business, University of Zagreb, Zagreb, Croatia
Mirjana Čižmešija orcid.org/0000-0002-9873-7291 ; Faculty of Economics and Business, University of Zagreb, Zagreb, Croatia

Abstract

This paper aims to assess the possibility of predicting Croatian recessionary
episodes using probit models. The authors first estimate a baseline static model
using four leading indicators of recession (monetary base, unemployment,
industrial production, and CROBEX stock market index). Lag lengths of up to 6
months are examined for each of the observed variables in the probit specification,
and several important conclusions arise from the estimated models. First, the stock
market and money supply exhibit the most pronounced leading characteristics in
the Croatian economy (a 3-month lag length is selected by the information
criteria). Second, the dynamic model (including a lagged dependent dummy
variable) significantly outperforms the baseline static model. Third, the authors
augment the probit model by the Economic Sentiment Indicator, which significantly
contributes to the model accuracy. The latter confirms the main hypothesis of the
paper, going in line with the assertion that psychological factors largely govern
the economic cycles, growing in significance in times of economic hardship.

Keywords

Recession forecasting; probit regression; Economic Sentiment Index; Business and Consumer Surveys

Hrčak ID:

171163

URI

https://hrcak.srce.hr/171163

Publication date:

22.12.2016.

Article data in other languages: croatian

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