Lloyd, S., Manuel, E. and Panchev, K.
Foreign Vulnerabilities, Domestic Risks: The Global Drivers of GDP-at-Risk
CWPE2156
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
JEL Codes: E44 E58 F30 F41 F44 G01
PDF: https://www.econ.cam.ac.uk/research-files/repec/cam/pdf/cwpe2156.pdf 
Open Access Link: https://doi.org/10.17863/CAM.83978
Keynes Fund Project(s):
Disaster Risk, Asset Prices and the Macroeconomy (JHUX)
