Working Paper: NBER ID: w16998
Authors: Gianni De Nicol; Marcella Lucchetta
Abstract: This paper presents a modeling framework that delivers joint forecasts of indicators of systemic real risk and systemic financial risk, as well as stress-tests of these indicators as impulse responses to structural shocks identified by standard macroeconomic and banking theory. This framework is implemented using large sets of quarterly time series of indicators of financial and real activity for the G-7 economies for the 1980Q1-2009Q3 period. We obtain two main results. First, there is evidence of out-of sample forecasting power for tail risk realizations of real activity for several countries, suggesting the usefulness of the model as a risk monitoring tool. Second, in all countries aggregate demand shocks are the main drivers of the real cycle, and bank credit demand shocks are the main drivers of the bank lending cycle. These results challenge the common wisdom that constraints in the aggregate supply of credit have been a key driver of the sharp downturn in real activity experienced by the G-7 economies in 2008Q4-2009Q1.
Keywords: systemic risk; macroeconomy; forecasting; G7 economies; quantile regression
JEL Codes: E17; E44; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| aggregate demand shocks (E00) | real cycle (E32) |
| bank credit demand shocks (E51) | bank lending cycle (G21) |
| aggregate demand shocks (E00) | systemic risk indicators (E44) |
| bank credit demand shocks (E51) | systemic risk indicators (E44) |