Working Paper: CEPR ID: DP15864
Authors: David Aikman; Jonathan Bridges; Sinem Hacioglu; Hoke Cian O'Neill; Akash Raja
Abstract: Using quantile regressions applied to a panel dataset of 16 advanced economies, we examine how downside risk to growth over the medium term is affected by a set of macroprudential indicators. We find that credit and property price booms, and wide current account deficits increase downside risks 3 to 5 years ahead. However, such downside risks can be partially mitigated by increasing the capital ratio of the banking system. We show that GDP-at-Risk, defined as the the 5th quantile of the projected GDP growth distribution three years ahead, deteriorated in the US in the run-up to the Global Financial Crisis, driven by rapid growth in credit and house prices alongside a widening current account deficit. Our results suggest such indicators could provide useful information for the stance of macroprudential policy.
Keywords: financial stability; gdpatrisk; macroprudential policy; quantile regressions; local projections
JEL Codes: G01; G18; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| credit and property price booms (E51) | gdpatrisk (Y70) |
| wide current account deficits (F32) | gdpatrisk (Y70) |
| 3-year change in the credit-to-GDP ratio (E49) | gdpatrisk (Y70) |
| real house price growth (R31) | gdpatrisk (Y70) |
| bank capital ratios (G28) | gdpatrisk (Y70) |