Asymmetric Risks to the Economic Outlook Arising from Financial System Vulnerabilities

Thibaut Duprey

No 2018-6, Staff Analytical Notes from Bank of Canada

Abstract: When financial system vulnerabilities are elevated, they can give rise to asymmetric risks to the economic outlook. To illustrate this, I consider the economic outlook presented in the Bank of Canada’s October 2017 Monetary Policy Report in the context of two key financial system vulnerabilities: high levels of household indebtedness and housing market imbalances. Uncertainty on the profile of consumption by indebted households—and, therefore, risks to growth in gross domestic product (GDP)—arises from higher interest rates and from recent changes to the Office of the Superintendent of Financial Institutions’ B-20 mortgage underwriting guideline. I use non-linear Bayesian techniques to capture the potential amplification of negative shocks in a vulnerable environment. I find that the materialization of larger-than-expected impacts on consumption from higher interest rates and/or the tighter mortgage qualifying criteria would imply asymmetric risks to GDP growth.

Keywords: Business fluctuations and cycles; Econometric and statistical methods; Financial stability; Financial system regulation and policies; Monetary and financial indicators; Recent economic and financial developments; Uncertainty and monetary policy (search for similar items in EconPapers)
JEL-codes: C C0 C01 C1 C11 C15 E E1 E17 E3 E32 E37 E4 E44 E47 E5 E58 E6 E66 G G0 G01 G1 G18 (search for similar items in EconPapers)
Pages: 13 pages
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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