Foreign Vulnerabilities, Domestic Risks: The Global Drivers of GDP-at-Risk
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Authors
Lloyd, S.
Manuel, E.
Panchev, K.
Publication Date
2021-08-02Series
Cambridge Working Papers in Economics
Janeway Institute Working Paper Series
Publisher
Faculty of Economics, University of Cambridge
Type
Working Paper
Previous Version(s)
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Lloyd, S., Manuel, E., & Panchev, K. (2021). Foreign Vulnerabilities, Domestic Risks: The Global Drivers of GDP-at-Risk. https://doi.org/10.17863/CAM.83978
Abstract
We study how foreign financial developments influence the conditional distribution of domestic GDP growth. Within a quantile regression setup, we propose a method to parsimoniously account for foreign vulnerabilities using bilateral-exposure weights when assessing downside macroeconomic risks. Using a panel dataset of advanced economies, we show that tighter foreign financial conditions and faster foreign credit-to-GDP growth are associated with a more severe left tail of domestic GDP growth, even when controlling for domestic indicators. The inclusion of foreign indicators significantly improves estimates of ‘GDP-at-Risk’, a summary measure of downside risks. In turn, this yields time-varying estimates of higher moments of GDP growth that demonstrate interpretable moves over the cycle. Decomposing historical estimates of GDP-at-Risk into domestic and foreign sources, we show that foreign shocks are a key driver of domestic macroeconomic tail risks.
Keywords
Financial stability, GDP-at-Risk, International spillovers, Local projections, Quantile regression, Tail risk
Identifiers
CWPE2156, JIWP2102
This record's DOI: https://doi.org/10.17863/CAM.83978
This record's URL: https://www.repository.cam.ac.uk/handle/1810/336557
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