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Financial Conditions and Macroeconomic Downside Risks in the Euro Area

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  • Lhuissier Stéphane

Abstract

Motivated by empirically characterizing the relationship between financial conditions and downside macroeconomic risks in the euro area, I develop a regime-switching skew-normal model with time-varying probabilities of transitions. Using Bayesian methods, the model estimates show that a strong cyclical pattern emerges from the conditional skewness (a measure of the asymmetry of the predictive distribution), which has a tendency to rapidly decline to negative territory prior and during recessions. However, the inclusion of financial-specific information in time-varying probabilities does not help to anticipate such skewness nor more generally to provide advance warnings of tail risks.

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  • Lhuissier Stéphane, 2022. "Financial Conditions and Macroeconomic Downside Risks in the Euro Area," Working papers 863, Banque de France.
    • Handle: RePEc:bfr:banfra:863
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    More about this item

    Keywords

    Financial Conditions; Downside Risks; Predictability; Regime-Switching Models;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C2 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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