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Foreign vulnerabilities, domestic risks: the global drivers of GDP-at-Risk

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  • Lloyd, Simon

    (Bank of England)

  • Manuel, Ed

    (Bank of England)

  • Panchev, Konstantin

    (University of Oxford)

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 data set 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 GDP growth moments that are interpretable and provide advanced warnings of crisis episodes. 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, Simon & Manuel, Ed & Panchev, Konstantin, 2021. "Foreign vulnerabilities, domestic risks: the global drivers of GDP-at-Risk," Bank of England working papers 940, Bank of England.
  • Handle: RePEc:boe:boeewp:0940
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    5. Busetto, Filippo, 2024. "Asymmetric expectations of monetary policy," Bank of England working papers 1058, Bank of England.
    6. Bank for International Settlements, 2022. "Private sector debt and financial stability," CGFS Papers, Bank for International Settlements, number 67, december.

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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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