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Modeling and Forecasting Macroeconomic Downside Risk

Author

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  • Petrella, Ivan
  • Delle Monache, Davide
  • De Polis, Andrea

Abstract

We model permanent and transitory changes of the predictive density of US GDP growth. A substantial increase in downside risk to US economic growth emerges over the last 30 years, associated with the long-run growth slowdown started in the early 2000s. Conditional skewness moves procyclically, implying negatively skewed predictive densities ahead and during recessions, often anticipated by deteriorating financial conditions. Conversely, positively skewed distributions characterize expansions. The modelling framework ensures robustness to tail events, allows for both dense or sparse predictor designs, and delivers competitive out-of-sample (point, density and tail) forecasts, improving upon standard benchmarks.

Suggested Citation

  • Petrella, Ivan & Delle Monache, Davide & De Polis, Andrea, 2022. "Modeling and Forecasting Macroeconomic Downside Risk," CEPR Discussion Papers 15109, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:15109
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    More about this item

    Keywords

    Business cycle; Downside risk; Skewness; Score driven models; Financial conditions;
    All these keywords.

    JEL classification:

    • 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
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods

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