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Financial conditions and macroeconomic downside risks in the euro area

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  • Lhuissier, Stéphane

Abstract

Motivated by empirically characterizing the relationship between financial conditions and downside macroeconomic risks in the euro area, I develop a regime-switching skew-normal model with time-varying probabilities of transitions. Using Bayesian methods, the model estimates show that a strong cyclical pattern emerges from the conditional skewness, which has a tendency to rapidly decline to negative territory prior and during recessions. However, the inclusion of financial-specific information in time-varying probabilities does not help to anticipate such skewness nor more generally to provide advance warnings of tail risks.

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  • Lhuissier, Stéphane, 2022. "Financial conditions and macroeconomic downside risks in the euro area," European Economic Review, Elsevier, vol. 143(C).
    • Handle: RePEc:eee:eecrev:v:143:y:2022:i:c:s0014292122000101
    DOI: 10.1016/j.euroecorev.2022.104046
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    2. Andrea Carriero & Todd E. Clark & Massimiliano Marcellino, 2024. "Capturing Macro‐Economic Tail Risks with Bayesian Vector Autoregressions," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 56(5), pages 1099-1127, August.
    3. Stéphane Lhuissier & Aymeric Ortmans & Fabien Tripier, 2024. "The Risk of Inflation Dispersion in the Euro Area," Working papers 954, Banque de France.

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    More about this item

    Keywords

    Financial conditions; Downside risks; Predictability; Regime-switching models;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C2 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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