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Macroeconomic activity and risk indicators: an unstable relationship

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  • Angela Abbate
  • Massimiliano Marcellino

Abstract

We assess to what extent indicators of financial conditions can be considered relevant determinants and predictors of macroeconomic aggregates. The main finding is that controlling for default risk and risk aversion measures improves the forecasts of output, employment and loans, but that this improvement is largely attributable to the recession periods of 2001 and 2008. A structural VAR analysis further reveals that financial condition indicators display significant real effects only after the Great Financial Crisis. In particular, an unexpected increase in the credit spread in 2010 causes an output contraction that lasts for about two years, with an annualised through of 4.8%, and explains up to 35% of the forecast error variance of industrial production.

Suggested Citation

  • Angela Abbate & Massimiliano Marcellino, 2017. "Macroeconomic activity and risk indicators: an unstable relationship," BAFFI CAREFIN Working Papers 1756, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    • Handle: RePEc:baf:cbafwp:cbafwp1756
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    References listed on IDEAS

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    Cited by:

    1. Francesco Corsello & Valerio Nispi Landi, 2020. "Labor Market and Financial Shocks: A Time‐Varying Analysis," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 52(4), pages 777-801, June.

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    More about this item

    Keywords

    forecasting; credit spreads; SVAR; time-varying parameters;
    All these keywords.

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy
    • E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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