Lloyd, S., Manuel, E. and Panchev, K.

Foreign Vulnerabilities, Domestic Risks: The Global Drivers of GDP-at-Risk

IMF Economic Review

(2023)

Abstract: We study how foreign financial developments influence the conditional distribution of domestic GDP growth. We propose a method to account for foreign vulnerabilities using bilateral-exposure weights when assessing downside macroeconomic risks within quantile regressions. For an advanced-economy panel, 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 controlling for domestic indicators. Incorporating foreign variables improves estimates of domestic GDP-at-Risk, both in and out of sample. Decomposing GDP-at-Risk into domestic and foreign origins, we show that foreign shocks are a key driver of domestic macroeconomic tail risks.

Keywords: Financial stability, GDP-at-Risk, International spillovers, Local projections, Quantile regression, Tail risk

JEL Codes: E44, E58, F30, F41, F44, G01

Publisher's Link: https://doi.org/10.1057/s41308-023-00199-7