Nonlinear Drivers of Macroeconomic Tail Risk: A Threshold Stochastic Volatility-in-Mean VAR with Regime-Dependent Leverage

Haroon Mumtaz and Sofia Velasco

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Abstract: The tails of macroeconomic outcomes can respond differently from the centre of their distribution to aggregate shocks. We demonstrate this via a threshold stochastic-volatility-in-mean VAR with regime-dependent leverage. The model allows interactions between the endogenous variables and their volatility, contemporaneous level-volatility dependence, and regime-specific propagation. We estimate the model using a long-run U.S. data set, finding evidence for three inflation-based regimes. We identify business-cycle, financial, macroeconomic-uncertainty, and financial-uncertainty shocks and decompose their contributions to growth- and inflation-at-risk. Business-cycle shocks dominate the median response of GNP growth but account for a substantially smaller share of growth-at-risk. In contrast, uncertainty makes a material contribution to both growth- and inflation-at-risk.

Date: 2026-09, Revised 2026-10
New Economics Papers: this item is included in nep-ecm and nep-rmg
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