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Lloyd, S., Manuel, E. and Panchev, K.

Foreign Vulnerabilities, Domestic Risks: The Global Drivers of GDP-at-Risk

JIWP Number: 2102

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

JEL Codes: E44 E58 F30 F41 F44 G01

PDF: jiwp2102.pdf

Open Access Link: 10.17863/CAM.83978

Keynes Fund Project(s):
Disaster Risk, Asset Prices and the Macroeconomy (JHUX)  

Theme: institutions