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Expecting the unexpected: Stressed scenarios for economic growth

Author

Listed:
  • Gloria Gonzalez-Rivera

    (Department of Economics, University of California Riverside)

  • Vladimir Rodriguez-Caballero

    (ITAM (Mexico))

  • Esther Ruiz

    (Universidad Carlos III de Madrid (Spain))

Abstract

We propose the construction of conditional growth densities under stressed factor scenarios to assess the level of exposure of an economy to small probability but potentially catastrophic economic and/or fi nancial scenarios, which can be either domestic or international. The choice of severe yet plausible stress scenarios is based on the joint probability distribution of the underlying factors driving growth, which are extracted with a multi-level Dynamic Factor Model (DFM) from a wide set of domestic/worldwide and/or macroeconomic/fi nancial variables. All together, we provide a risk management tool that allows for a complete visualization of the dynamics of the growth densities under average scenarios and extreme scenarios. We calculate Growth-in-Stress (GiS) measures, defi ned as the 5% quantile of the stressed growth densities, and show that GiS is a useful and complementary tool to Growth-at-Risk (GaR) when policymakers wish to carry out a multi-dimensional scenario analysis. The unprecedented economic shock brought by the COVID19 pandemic provides a natural environment to assess the vulnerability of US growth with the proposed methodology.

Suggested Citation

  • Gloria Gonzalez-Rivera & Vladimir Rodriguez-Caballero & Esther Ruiz, 2023. "Expecting the unexpected: Stressed scenarios for economic growth," Working Papers 202314, University of California at Riverside, Department of Economics.
    • Handle: RePEc:ucr:wpaper:202314
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    File URL: https://economics.ucr.edu/repec/ucr/wpaper/202314.pdf
    File Function: First version, 2023
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    References listed on IDEAS

    as
    1. Jenny Lye & Joe Hirschberg, 2018. "Ratios of Parameters: Some Econometric Examples," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 51(4), pages 578-602, December.
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      Keywords

      Growth vulnerability; Multi-level factor model; Scenario analysis; Stressed factors;
      All these keywords.

      JEL classification:

      • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
      • C55 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Large Data Sets: Modeling and Analysis
      • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
      • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
      • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles
      • F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation: Models and Applications
      • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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