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

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  • Lloyd, S.
  • Manuel, E.
  • Panchev, K.
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.

Suggested Citation

  • Lloyd, S. & Manuel, E. & Panchev, K., 2021. "Foreign Vulnerabilities, Domestic Risks: The Global Drivers of GDP-at-Risk," Janeway Institute Working Papers 2102, Faculty of Economics, University of Cambridge.
    • Handle: RePEc:cam:camjip:2102
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    2. Potjagailo, Galina & Wolters, Maik H., 2023. "Global financial cycles since 1880," Journal of International Money and Finance, Elsevier, vol. 131(C).
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    4. Coman, Andra, 2023. "Monetary policy spillovers and the role of prudential policies in the European Union," Working Paper Series 2854, European Central Bank.
    5. Bank for International Settlements, 2022. "Private sector debt and financial stability," CGFS Papers, Bank for International Settlements, number 67, december.
    6. Busetto, Filippo, 2024. "Asymmetric expectations of monetary policy," Bank of England working papers 1058, Bank of England.

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    More about this item

    Keywords

    Financial stability; GDP-at-Risk; International spillovers; Local projections; Quantile regression; Tail risk;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F30 - International Economics - - International Finance - - - General
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles
    • G01 - Financial Economics - - General - - - Financial Crises

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