Expecting the unexpected: Stressed scenarios for economic growth

Gloria Gonzalez-Rivera, Vladimir Rodriguez-Caballero and Esther Ruiz ()
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Vladimir Rodriguez-Caballero: ITAM (Mexico)
Authors registered in the RePEc Author Service: Carlos Vladimir Rodriguez Caballero

No 202314, Working Papers from University of California at Riverside, Department of Economics

Abstract: We propose the construction of conditional growth densities under stressed factor scenarios to assess the level of exposure of an economy to small probability but potentially catastrophic economic and/or fi nancial scenarios, which can be either domestic or international. The choice of severe yet plausible stress scenarios is based on the joint probability distribution of the underlying factors driving growth, which are extracted with a multi-level Dynamic Factor Model (DFM) from a wide set of domestic/worldwide and/or macroeconomic/fi nancial variables. All together, we provide a risk management tool that allows for a complete visualization of the dynamics of the growth densities under average scenarios and extreme scenarios. We calculate Growth-in-Stress (GiS) measures, defi ned as the 5% quantile of the stressed growth densities, and show that GiS is a useful and complementary tool to Growth-at-Risk (GaR) when policymakers wish to carry out a multi-dimensional scenario analysis. The unprecedented economic shock brought by the COVID19 pandemic provides a natural environment to assess the vulnerability of US growth with the proposed methodology.

Keywords: Growth vulnerability; Multi-level factor model; Scenario analysis; Stressed factors (search for similar items in EconPapers)
JEL-codes: C32 C55 E32 E44 F44 F47 O41 (search for similar items in EconPapers)
Pages: 54 Pages
Date: 2023-11
New Economics Papers: this item is included in nep-mac and nep-rmg
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https://economics.ucr.edu/repec/ucr/wpaper/202314.pdf First version, 2023 (application/pdf)

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Journal Article: Expecting the unexpected: Stressed scenarios for economic growth (2024)
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