Financial conditions and macroeconomic downside risks in the euro area

Stéphane Lhuissier

European Economic Review, 2022, vol. 143, issue C

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, 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)
Date: 2022
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Citations: View citations in EconPapers (2)

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Working Paper: Financial Conditions and Macroeconomic Downside Risks in the Euro Area (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:143:y:2022:i:c:s0014292122000101

DOI: 10.1016/j.euroecorev.2022.104046

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