Foreign Vulnerabilities, Domestic Risks: The Global Drivers of GDP-at-Risk

Simon Lloyd, Ed Manuel and Konstantin Panchev

Janeway Institute Working Papers from Faculty of Economics, University of Cambridge

Abstract: We study how foreign financial developments influence the conditional distribution of domestic GDP growth. Within a quantile regression setup, we propose a method to parsimoniously account for foreign vulnerabilities using bilateral-exposure weights when assessing downside macroeconomic risks. Using a panel dataset of advanced economies, we show that tighter foreign financial conditions and faster foreign credit-to-GDP growth are associated with a more severe left tail of domestic GDP growth, even when controlling for domestic indicators. The inclusion of foreign indicators significantly improves estimates of ‘GDP-at-Risk', a summary measure of downside risks. In turn, this yields time-varying estimates of higher moments of GDP growth that demonstrate interpretable moves over the cycle. Decomposing historical estimates of GDP-at-Risk into domestic and foreign sources, we show that foreign shocks are a key driver of domestic macroeconomic tail risks.

Keywords: Financial stability; GDP-at-Risk; International spillovers; Local projections; Quantile regression; Tail risk (search for similar items in EconPapers)
JEL-codes: E44 E58 F30 F41 F44 G01 (search for similar items in EconPapers)
Date: 2021-07-30
New Economics Papers: this item is included in nep-cwa, nep-mac, nep-opm and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Related works:
Journal Article: Foreign Vulnerabilities, Domestic Risks: The Global Drivers of GDP-at-Risk (2024)
Working Paper: Foreign vulnerabilities, domestic risks: the global drivers of GDP-at-Risk (2021)
Working Paper: Foreign Vulnerabilities, Domestic Risks: The Global Drivers of GDP-at-Risk (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:cam:camjip:2102

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