Economic Growth at Risk: An Application to Chile

This paper applies the Growth-at-Risk (G@R) methodology proposed by Adrian et al. (2019) to the Chilean economy. To this aim, we first develop a Financial Conditions Index (FCI) from a broad set of local and external macro-financial variables covering the period from 1994 to 2020, such as asset prices, short and long-term spreads, and volatility measures that characterizes the vulnerabilities of the domestic financial market. The FCI identifies periods of substantial tight financial conditions that coincide with several episodes of economic downturns and market turmoils such as the 1997 Asian Crisis, the 2007-2009 Global Financial Crisis, and the coronavirus pandemic in mid-March 2020. The G@R analysis reveals that the FCI contains relevant information to forecast lower future GDP growth distribution quantiles. Thus, our results show that downside risks to growth intensify during periods of economic and financial distress. In particular, the 5th percent quantile of economic growth during the 2007-2009 Global Financial crisis reached roughly -10% due to tighter financial conditions propelled by the deterioration of the credit to GDP gap and adverse external conditions such as higher global volatility and lower terms of trade. These findings, and others discussed in the paper, highlight this methodology’s usefulness as an additional tool to support monitoring and risk management duties by policymakers.