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Financial Conditions and Macroeconomic Downside Risks in the Euro Area

Stéphane Lhuissier

Working papers from Banque de France

Abstract: Motivated by empirically characterizing the relationship between financial conditions and downside macroeconomic risks in the euro area, I develop a regime-switching skew-normal model with time-varying probabilities of transitions. Using Bayesian methods, the model estimates show that a strong cyclical pattern emerges from the conditional skewness (a measure of the asymmetry of the predictive distribution), which has a tendency to rapidly decline to negative territory prior and during recessions. However, the inclusion of financial-specific information in time-varying probabilities does not help to anticipate such skewness nor more generally to provide advance warnings of tail risks.

Keywords: Financial Conditions; Downside Risks; Predictability; Regime-Switching Models (search for similar items in EconPapers)
JEL-codes: C11 C2 E32 (search for similar items in EconPapers)
Pages: 52 pages
Date: 2022
New Economics Papers: this item is included in nep-cwa, nep-ecm, nep-eec, nep-fdg, nep-his, nep-mac, nep-ore and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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