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Growth at Risk and Financial Stability

Author

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  • O'Brien, Martin

    (Central Bank of Ireland)

  • Wosser, Michael

    (Central Bank of Ireland)

Abstract

Growth at Risk (GaR) provides a methodology for understanding how financial conditions and the level of financial vulnerabilities contribute to the possibility of future episodes of weak economic growth. Using the GaR framework, we show that the likelihood and severity of future weak or negative economic growth in Ireland rises during periods where risks to financial stability are growing. In particular, we show that near term tail risks are heavily influenced by prevailing financial market conditions, but that medium horizon risks are more dependent upon systemic financial vulnerabilities, such as when credit growth is excessive. Our empirical analysis also suggests that structural characteristics of Ireland’s economy or financial system make it more exposed to potential weak growth outcomes, compared with other countries in our sample. We discuss how macroprudential policy can be better informed by tracking developments in the severity and likelihood of weak or negative economic outcomes made possible by a GaR framework.

Suggested Citation

  • O'Brien, Martin & Wosser, Michael, 2021. "Growth at Risk and Financial Stability," Financial Stability Notes 2/FS/21, Central Bank of Ireland.
    • Handle: RePEc:cbi:fsnote:2/fs/21
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    File URL: https://www.centralbank.ie/docs/default-source/publications/financial-stability-notes/no-2-growth-at-risk-and-financial-stability-(o'brien-and-wosser).pdf?sfvrsn=5
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    Cited by:

    1. Hallissey, Niamh & Killeen, Neill & Wosser, Michael, 2022. "Identifying and assessing systemic risks in Ireland: a review of the Central Bank’s toolkit," Financial Stability Notes 16/FS/22, Central Bank of Ireland.
    2. Tihana Škrinjarić, 2023. "Credit-to-GDP Gap Estimates in Real Time: A Stable Indicator for Macroprudential Policy Making in Croatia," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 65(3), pages 582-614, September.
    3. Tihana Skrinjaric, 2023. "Leading indicators of financial stress in Croatia: a regime switching approach," Public Sector Economics, Institute of Public Finance, vol. 47(2), pages 205-232.

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