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Managing GDP Tail Risk

Author

Listed:
  • Thibaut Duprey
  • Alexander Ueberfeldt

Abstract

We propose a novel framework to analyze how policy-makers can manage risks to the median projection and risks specific to the tail of gross domestic product (GDP) growth. By combining a quantile regression of GDP growth with a vector autoregression, we show that monetary and macroprudential policy shocks can reduce credit growth and thus GDP tail risk. So policymakers concerned about GDP tail risk would choose a tighter policy stance at the expense of macroeconomic stability. Using Canadian data, we show how our framework can add tail event information to projection models that ignore them and give policy-makers a tool to communicate the trade-offs they face.

Suggested Citation

  • Thibaut Duprey & Alexander Ueberfeldt, 2020. "Managing GDP Tail Risk," Staff Working Papers 20-3, Bank of Canada.
    • Handle: RePEc:bca:bocawp:20-3
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Hristov, Nikolay & Hülsewig, Oliver & Kolb, Benedikt, 2024. "Macroprudential capital regulation and fiscal balances in the euro area," Journal of International Money and Finance, Elsevier, vol. 143(C).
    2. Suarez, Javier, 2022. "Growth-at-risk and macroprudential policy design," Journal of Financial Stability, Elsevier, vol. 60(C).
    3. Martin Gächter & Martin Geiger & Elias Hasler, 2023. "On the Structural Determinants of Growth-at-Risk," International Journal of Central Banking, International Journal of Central Banking, vol. 19(2), pages 251-293, June.
    4. Tihana Skrinjaric, 2022. "Macroeconomic effects of systemic stress: a rolling spillover index approach," Public Sector Economics, Institute of Public Finance, vol. 46(1), pages 109-140.
    5. Lang, Jan Hannes & Rusnák, Marek & Greiwe, Moritz, 2023. "Medium-term growth-at-risk in the euro area," Working Paper Series 2808, European Central Bank.
    6. Jorge E. Galán & María Rodríguez Moreno, 2020. "At-risk measures and financial stability," Revista de Estabilidad Financiera, Banco de España, issue Autumn.
    7. Aikman, David & Bluwstein, Kristina & Karmakar, Sudipto, 2021. "A tail of three occasionally-binding constraints: a modelling approach to GDP-at-Risk," Bank of England working papers 931, Bank of England.
    8. Chen, David Xiao & Friedrich, Christian, 2023. "The countercyclical capital buffer and international bank lending: Evidence from Canada," Journal of International Money and Finance, Elsevier, vol. 139(C).
    9. Michal Franta & Jan Libich, 2024. "Holding the economy by the tail: analysis of short- and long-run macroeconomic risks," Empirical Economics, Springer, vol. 66(4), pages 1443-1489, April.
    10. Deng, Chuang & Wu, Jian, 2023. "Macroeconomic downside risk and the effect of monetary policy," Finance Research Letters, Elsevier, vol. 54(C).
    11. Coulier, Lara & De Schryder, Selien, 2024. "Assessing the effects of borrower-based macroprudential policy on credit in the EU using intensity-based indices," Journal of International Money and Finance, Elsevier, vol. 142(C).
    12. Thibaut Duprey, 2020. "Canadian Financial Stress and Macroeconomic Condition," Canadian Public Policy, University of Toronto Press, vol. 46(S3), pages 236-260, October.
    13. Zhou, Yang, 2024. "Benefits and costs: The impact of capital control on growth-at-risk in China," International Review of Financial Analysis, Elsevier, vol. 93(C).
    14. Milan Szabo, 2020. "Growth-at-Risk: Bayesian Approach," Working Papers 2020/3, Czech National Bank.
    15. Chavleishvili, Sulkhan & Fahr, Stephan & Kremer, Manfred & Manganelli, Simone & Schwaab, Bernd, 2021. "A risk management perspective on macroprudential policy," Working Paper Series 2556, European Central Bank.

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    More about this item

    Keywords

    Central bank research; Economic models; Financial stability; Financial system regulation and policies; Interest rates; Monetary Policy; Monetary policy framework;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • G01 - Financial Economics - - General - - - Financial Crises

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