Financial market volatility: informative in predicting recessions

It is commonly agreed that the term spread and stock returns are useful in predicting recessions. We extend these empirical findings by examining interest rate and stock market volatility as additional recession indicators. Both risk-return analysis and the theory of investment under uncertainty provide a rationale for this extension. The results for the United States, Germany and Japan show that interest rate and stock return volatility contribute significantly to the forecasting of future recessions. This holds in particular for short term predictions.business cycles; stock market volatility; interest rate volatility; probit model

Understanding the Macro-financial Effects of Household Debt: A Global Perspective

Higher household debt is associated with lower future GDP growth in a broad set of 80 countries over the period 1950–2016. Several institutional factors, such as flexible exchange rates, capital account openness, higher financial development and inclusion, mitigate this negative relationship. Three mutually reinforcing mechanisms help explain this relationship. First, increases in household debt amplify the probability of future banking crises, which significantly disrupts financial intermediation. Second, crash risk may be systematically neglected due to investors’ overoptimistic expectations associated with household debt booms. Third, debt overhang impairs household consumption when negative shocks hit