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Assessing Macroeconomic Tail Risk

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  • Francesca Loria
  • Christian Matthes
  • Donghai Zhang

Abstract

What drives macroeconomic tail risk? To answer this question, we borrow a definition of macroeconomic risk from Adrian et al. (2019) by studying (left-tail) percentiles of the forecast distribution of GDP growth. We use local projections (Jord, 2005) to assess how this measure of risk moves in response to economic shocks to the level of technology, monetary policy, and financial conditions. Furthermore, by studying various percentiles jointly, we study how the overall economic outlook-as characterized by the entire forecast distribution of GDP growth-shifts in response to shocks. We find that contractionary shocks disproportionately increase downside risk, independently of what shock we look at.

Suggested Citation

  • Francesca Loria & Christian Matthes & Donghai Zhang, 2019. "Assessing Macroeconomic Tail Risk," Finance and Economics Discussion Series 2019-026, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgfe:2019-26
    DOI: 10.17016/FEDS.2019.026
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    File URL: https://www.federalreserve.gov/econres/feds/files/2019026pap.pdf
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    Cited by:

    1. Andrea Carriero & Todd E. Clark & Massimiliano Marcellino, 2020. "Capturing Macroeconomic Tail Risks with Bayesian Vector Autoregressions," Working Papers 202002R, Federal Reserve Bank of Cleveland, revised 22 Sep 2020.
    2. Òscar Jordà & Martin Kornejew & Moritz Schularick & Alan M. Taylor, 2020. "Zombies at Large? Corporate Debt Overhang and the Macroeconomy," Staff Reports 951, Federal Reserve Bank of New York.
    3. De Santis, Roberto A. & Van der Veken, Wouter, 2020. "Forecasting macroeconomic risk in real time: Great and Covid-19 Recessions," Working Paper Series 2436, European Central Bank.

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    More about this item

    Keywords

    Macroeconomic risk; Shocks; Local projections;

    JEL classification:

    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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