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Financial conditions, business cycle fluctuations and growth at risk

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  • Falconio, Andrea
  • Manganelli, Simone

Abstract

We study the macroeconomic consequences of financial shocks and increase in economic risk using a quantile vector autoregression. Financial shocks have a negative, but asymmetric impact on the real economy: they substantially increase growth at risk, but have limited impact on upside potential. The impact of financial shocks is explained away after controlling for economic risk (measured by the interquantile range). The effects are economically relevant. Bad economic environment, characterized by negative real and financial shocks, has a highly skewed impact on business cycle fluctuations, leading to a peak reduction of monthly industrial production by more than 2%. In comparison, positive real and financial shocks in a good economic environment have limited effect on upside potential of the economy. JEL Classification: C32, C53, E32, E44

Suggested Citation

  • Falconio, Andrea & Manganelli, Simone, 2020. "Financial conditions, business cycle fluctuations and growth at risk," Working Paper Series 2470, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20202470
    Note: 2171716
    as

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    File URL: https://www.ecb.europa.eu//pub/pdf/scpwps/ecb.wp2470~8990feec12.en.pdf
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    References listed on IDEAS

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    Cited by:

    1. Tihana Skrinjaric & Maja Sabol, 2024. "Easier Said than Done: Predicting Downside Risks to House Prices in Croatia," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 74(1), pages 43-72, March.
    2. Tihana Škrinjarić, 2023. "Macroprudential stance assessment: problems of measurement, literature review and some comments for the case of Croatia," Working Papers 72, The Croatian National Bank, Croatia.
    3. Luke Hartigan & Michelle Wright, 2021. "Financial Conditions and Downside Risk to Economic Activity in Australia," RBA Research Discussion Papers rdp2021-03, Reserve Bank of Australia.
    4. Huang, Yu-Fan & Liao, Wenting & Luo, Sui & Ma, Jun, 2024. "Financial conditions, macroeconomic uncertainty, and macroeconomic tail risks," Journal of Economic Dynamics and Control, Elsevier, vol. 163(C).
    5. Lang, Jan Hannes & Rusnák, Marek & Greiwe, Moritz, 2023. "Medium-term growth-at-risk in the euro area," Working Paper Series 2808, European Central Bank.

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    More about this item

    Keywords

    financial conditions; quantile regression; risk; uncertainty;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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