Working Paper: CEPR ID: DP13349
Authors: Tobias Adrian; Nellie Liang; Federico Grinberg; Sheherya Malik
Abstract: Using panel quantile regressions, we show that the conditional distribution of GDP growth depends on financial conditions, with growth-at-risk (GaR)-defined as conditional growth at the lower 5th percentile-more responsive than the median or upper percentiles. The term structure of GaR features an intertemporal tradeoff: GaR is higher in the short run but lower in the medium run when initial financial conditions are loose relative to typical levels. This shift in the growth distribution generally is not incorporated when solving dynamic stochastic general equilibrium models with macrofinancial linkages, which suggests downside risks to GDP growth are systematically underestimated.
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Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Financial conditions (E66) | Distribution of forecasted GDP growth (E27) |
| Financial conditions (E66) | Growth-at-risk (GAR) (O44) |
| Initial financial conditions are loose (E44) | Higher GAR in the short run (E19) |
| Initial financial conditions are loose (E44) | Lower GAR in the medium term (E69) |
| Financial conditions (E66) | Price of risk (G19) |
| Price of risk (G19) | Changes in the distribution of GDP growth (F62) |
| Financial conditions (E66) | Regulatory capital constraints (G28) |
| Regulatory capital constraints (G28) | Risk-taking behavior of financial intermediaries (G21) |