Vulnerable Growth

Abstract

We study the conditional distribution of GDP growth as a function of economic and financial conditions. Deteriorating financial conditions are associated with an increase in the conditional volatility and a decline in the conditional mean of GDP growth, leading the lower quantiles of GDP growth to vary with financial conditions and the upper quantiles to be stable over time. Upside risks to GDP growth are low in most periods while downside risks increase as financial conditions become tighter. We argue that amplification mechanisms in the financial sector generate the observed growth vulnerability dynamics. (JEL C53, E23, E27, E32, E44)

Business cycle dynamics after the Great Recession

“…Looking at the intercept of the state equation, we notice that the discrepancy between high-and low-volatility recessions is twice bigger than between high-and low-volatility expansions. This asymmetry in the estimated impact of volatility on economic growth is consistent with the vulnerable growth dynamics recently put forward by Adrian et al (2019). These authors show that deteriorating financial conditions, as measured by the National Financial Conditions Index (NFCI), are associated with both an increase in the conditional volatility and a decrease in the conditional mean of quarterly GDP growth in the US.…”

Accounting for Macrofinancial Fluctuations and Turbulence

“…Very strong evidence of asymmetric autoregressive conditional heteroskedasticity (ARCH) effects is found, providing a basis for jointly decomposing the levels and volatilities of output and financial conditions into time varying contributions from sets of shocks. Consistent with the finding of Adrian, Boyarchenko and Giannone (2017), risk premia shocks are estimated to contribute disproportionately to cyclical output fluctuations and turbulence during occasional abrupt swings in financial conditions, across the fifteen largest national economies in the world. This phenomenon struck all of the economies most affected by the Global Financial Crisis, the Euro Area Sovereign Debt Crisis, and the Taper Tantrum.…”

“…These occasional bouts of cyclical output contraction and financial market turbulence may have a common cause. In a recent paper, Adrian, Boyarchenko and Giannone (2017) find that a tightening of financial conditions is associated with a reduction in the conditional mean and an increase in the conditional variance of output growth in the United States. They argue that these adverse effects on the conditional distribution of output growth are generated by financial amplification mechanisms.…”

Bayesian MIDAS Penalized Regressions: Estimation, Selection, and Prediction

“…As for the predictors, we consider 127 macroeconomic series extracted from the FRED-MD database (McCracken and Ng, 2016), that is the entire database excluding the series of non-borrowed reserves of depository institutions because of the extreme changes observed since 2008 (see Uematsu and Tanaka, 2019). Further, we also consider a set of daily and weekly financial data, which have proven to improve short-to medium-term macro forecasts (Andreou et al, 2013;Pettenuzzo et al, 2016;Adrian et al, 2019): the effective Federal Funds rate; the interest rate spread between the 10-year government bond rate and the Federal Funds rate; returns on the portfolio of small minus big stocks considered by Fama and French (1993); returns on the portfolio of high minus low book-to-market ratio stocks studied by Fama and French (1993); returns on a winner minus loser momentum spread portfolio; the Chicago Fed National Financial Conditions Index (NFCI), and in particular its three sub-indexes (risk, credit, and leverage). Finally, we consider the Aruoba-Diebold-Scotti (ADS) daily business conditions index (Aruoba et al, 2009) to track the real business cycle at high frequency.…”