DP17633 Predicting Recessions
This paper predicts recessions using the dispersion of deposit rates offered by banks on insured deposits. An increase in the dispersion of deposit rates can accurately predict re- cessions over long time horizons at the county, state, and national levels. We find that the growth of deposits, particularly uninsured deposits of riskier banks, slows down at the on- set of a downturn, regardless of whether the downturn was preceded by a credit boom. In turn, riskier banks increase their deposit rates to attract more funding to support their bal- ance sheet. The resulting increase in the dispersion of deposit rates predicts an impending economic downturn.