Review

“Expectations” is the Twenty-Second Henry Thornton Lecture, given by the author at the Department of Banking and Finance, City University Business School, London, England, on November 28, 2000.

When the government runs a deficit, it can borrow from the public—that is, it can create debt. Conversely, when the government runs a surplus, it can retire that debt. For the past three years, the federal government has recorded budget surpluses, and both the White House Office of Management and Budget and the Congressional Budget Office project that these surpluses will increase for at least the next decade.

A potentially troubling characteristic of the U.S. banking industry is the geographic concentration of many banks’ offices and operations. Historically, banking laws have prevented U.S. banks from branching into other countries and states. A potential adverse consequence of these regulations was to leave banks—especially small rural banks—vulnerable to local economic downturns. 

A number of recent articles have examined the ability of financial variables to predict recessions. In this article, Peter Sephton extends the literature by considering a nonlinear, nonparametric approach to predicting the probability of recession using multivariate adaptive regression splines (MARS).