Foreign vulnerabilities, domestic risks: the global drivers of GDP-at-Risk

Staff working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 17 September 2021

Staff Working Paper No. 940

By Simon Lloyd, Ed Manuel and Konstantin Panchev

We study how foreign financial developments influence the conditional distribution of domestic GDP growth. Within a quantile regression setup, we propose a method to parsimoniously account for foreign vulnerabilities using bilateral-exposure weights when assessing downside macroeconomic risks. Using a panel data set of advanced economies, we show that tighter foreign financial conditions and faster foreign credit-to-GDP growth are associated with a more severe left tail of domestic GDP growth, even when controlling for domestic indicators. The inclusion of foreign indicators significantly improves estimates of ‘GDP-at-Risk’, a summary measure of downside risks. In turn, this yields time-varying estimates of higher moments of GDP growth that demonstrate interpretable moves over the cycle. Decomposing historical estimates of GDP-at-Risk into domestic and foreign sources, we show that foreign shocks are a key driver of domestic macroeconomic tail risks.

This version was updated in May 2022.


Foreign vulnerabilities, domestic risks: the global drivers of GDP-at-Risk

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