The time-varying risk of Italian GDP

The uncertainty surrounding economic forecasts is generally related to multiple sources of risks, of domestic and foreign origin. This paper studies the predictive distribution of Italian GDP growth as a function of selected risk indicators, related to both financial and real economic developments. The conditional distribution is characterized by means of expectile regressions. Expectiles are closely related to the Expected Shortfall, a well-known measure of risk with desirable properties. Here a decomposition of Expected Shortfall in terms of contributions of different indicators is proposed, which allows to track over time the main drivers of risk. Our analysis of the predictive distribution of GDP confirms that financial conditions are relevant for the left tail of the distribution but it also highlights that indicators of global trade and uncertainty have strong explanatory power for both left and right tail. Their usefulness is supported also in a pseudo real-time predictive context. Overall, our findings suggest that Italian GDP risks have been mostly driven by foreign developments around the Great Recession, by domestic financial conditions at the time of the Sovereign Debt Crisis and by economic policy uncertainty in more recent years.