Assessing Macroeconomic Tail Risk

Abstract

What drives macroeconomic tail risk? To answer this question, we borrow a definition of macroeconomic risk from Adrian et al. (2019) by studying (left-tail) percentiles of the forecast distribution of GDP growth. We use local projections (Jordà, 2005) to assess how this measure of risk moves in response to economic shocks to the level of technology, monetary policy, and financial conditions. Furthermore, by studying various percentiles jointly, we study how the overall economic outlook-as characterized by the entire forecast distribution of GDP growth-shifts in response to shocks. We find that contractionary shocks disproportionately increase downside risk, independently of what shock we look at.

Multimodality in Macrofinancial Dynamics

“…Across data and methodologies, many papers have confirmed the stability of upside growth risk and the variability of its downside risk, often referred to as "vulnerable growth." These results have been validated with quantile regression(Adrian, Grinberg, Liang, and Malik, 2018), at higher frequencies(Ferrara, Mogliani, and Sahuc, 2019), conditionally on shocks(Loria, Matthes, and Zhang, 2018), with VAR with stochastic volatility affecting the conditional mean(Carriero, Clark, and Marcellino, 2018a;Caldara, Scotti, and Zhong, 2019), with Markov switching models(Doz, Ferrara, and Pionnier, 2019), in labor markets(Kiley, 2018), and in housing markets(Valckx, Deghi, Katagiri, Khadarina, and Shahid, 2019).…”