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Asymmetric Risks to the Economic Outlook Arising from Financial System Vulnerabilities

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  • Thibaut Duprey

Abstract

When financial system vulnerabilities are elevated, they can give rise to asymmetric risks to the economic outlook. To illustrate this, I consider the economic outlook presented in the Bank of Canada’s October 2017 Monetary Policy Report in the context of two key financial system vulnerabilities: high levels of household indebtedness and housing market imbalances. Uncertainty on the profile of consumption by indebted households—and, therefore, risks to growth in gross domestic product (GDP)—arises from higher interest rates and from recent changes to the Office of the Superintendent of Financial Institutions’ B-20 mortgage underwriting guideline. I use non-linear Bayesian techniques to capture the potential amplification of negative shocks in a vulnerable environment. I find that the materialization of larger-than-expected impacts on consumption from higher interest rates and/or the tighter mortgage qualifying criteria would imply asymmetric risks to GDP growth.

Suggested Citation

  • Thibaut Duprey, 2018. "Asymmetric Risks to the Economic Outlook Arising from Financial System Vulnerabilities," Staff Analytical Notes 2018-6, Bank of Canada.
    • Handle: RePEc:bca:bocsan:18-6
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    References listed on IDEAS

    as
    1. Sami Alpanda & Gino Cateau & Césaire Meh, 2018. "A policy model to analyze macroprudential regulations and monetary policy," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 51(3), pages 828-863, August.
    2. Chatterjee, Somnath & Chiu, Jeremy & Hacioglu-Hoke, Sinem & Duprey, Thibaut, 2017. "A financial stress index for the United Kingdom," Bank of England working papers 697, Bank of England.
    3. Tobias Adrian & Nina Boyarchenko & Domenico Giannone, 2019. "Vulnerable Growth," American Economic Review, American Economic Association, vol. 109(4), pages 1263-1289, April.
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    Cited by:

    1. Hyeongwoo Kim & Wen Shi & Hyun Hak Kim, 2020. "Forecasting financial stress indices in Korea: a factor model approach," Empirical Economics, Springer, vol. 59(6), pages 2859-2898, December.
    2. Tuzcuoglu, Kerem, 2024. "Nonlinear transmission of international financial stress," Economic Modelling, Elsevier, vol. 139(C).
    3. Thibaut Duprey & Alexander Ueberfeldt, 2018. "How to Manage Macroeconomic and Financial Stability Risks: A New Framework," Staff Analytical Notes 2018-11, Bank of Canada.
    4. Cameron MacDonald & Virginie Traclet, 2018. "The Framework for Risk Identification and Assessment," Technical Reports 113, Bank of Canada.
    5. Thibaut Duprey & Victoria Fernandes & Kerem Tuzcuoglu & Ruhani Walia, 2025. "Effects of macroprudential policy announcements on perceptions of systemic risks," Staff Analytical Notes 2025-4, Bank of Canada.

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    More about this item

    Keywords

    Business fluctuations and cycles; Econometric and statistical methods; Financial stability; Financial system regulation and policies; Monetary and financial indicators; Recent economic and financial developments; Uncertainty and monetary policy;
    All these keywords.

    JEL classification:

    • C - Mathematical and Quantitative Methods
    • C0 - Mathematical and Quantitative Methods - - General
    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • E - Macroeconomics and Monetary Economics
    • E1 - Macroeconomics and Monetary Economics - - General Aggregative Models
    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • E66 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General Outlook and Conditions
    • G - Financial Economics
    • G0 - Financial Economics - - General
    • G01 - Financial Economics - - General - - - Financial Crises
    • G1 - Financial Economics - - General Financial Markets
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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