Working Paper: CEPR ID: DP18076
Authors: Mario Forni; Luca Gambetti; Nicolo Maffeifaccioli; Luca Sala
Abstract: Financial shocks represent a major driver of fluctuations in tail risk, defined as the 5th percentile of the forecast distributions of output and inflation. Since the variance and the asymmetry of the forecast distributions are largely driven by the left tail, financial shocks turn out to play a prominent role for distribution dynamics. Monetary policy shocks also play a role in shaping risk, although its effects are smaller than those of financial shocks. These findings are obtained using a novel econometric approach which combines quantile regressions and Structural VARs.
Keywords: tail risk; uncertainty; skewness; forecast distribution; SVARs; financial shocks; monetary policy shocks; quantile regression
JEL Codes: C32; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| financial shocks (F65) | left tail of the forecast distribution of industrial production growth (E27) |
| monetary policy shocks (E39) | left tail of macroeconomic variables (E19) |
| financial shocks (F65) | uncertainty in industrial production and inflation forecasts (E27) |
| financial shocks (F65) | left skewness in industrial production and inflation forecasts (E27) |
| monetary policy shocks (E39) | offsetting real risk from financial shocks (G19) |