Economic vulnerability is state dependent

Leopoldo Catania (), Alessandra Luati () and Pierluigi Vallarino
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Leopoldo Catania: Aarhus University and CREATES, Postal: Fuglesangs Allé 4, 8210 Aarhus V, Denmark
Alessandra Luati: University of Bologna, Postal: Via Belle Arti 41, 40126 Bologna, Italy

CREATES Research Papers from Department of Economics and Business Economics, Aarhus University

Abstract: This paper shows that different states of the financial system command a different effect in worsening financial conditions on economic vulnerability. As soon as financial conditions start deteriorating, the economic outlook becomes more pessimistic and uncertain. No increase in macroeconomic uncertainty is expected when financial conditions worsen from an already tighter than usual situation. We also find that past information on GDP growth is paramount to study and predict economic vulnerability. Both these findings have relevant forecasting and policymaking implications, and persist once we consider other measures of the real economic activity. From a methodological perspective, we carry out the analysis under a novel approach which relies on the state of the art in dynamic modelling of multiple quantiles. The proposed methodology exploits the entire information of past GDP growth, can accommodate a state dependent effect of financial conditions and allows for statistical inference under the standard quasi maximum likelihood setting.

Keywords: Economic vulnerability; Macro-financial linkages; Growth-at-Risk; Score driven models (search for similar items in EconPapers)
JEL-codes: C32 C53 E32 E44 (search for similar items in EconPapers)
Pages: 39
Date: 2021-06-15
New Economics Papers: this item is included in nep-cwa, nep-fdg, nep-mac and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:aah:create:2021-09

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