A0718
Title: Understanding growth-at-risk: A Markov-switching approach
Authors: Francesca Loria - Federal Reserve Board (United States) [presenting]
Abstract: Both financial and macroeconomic conditions matter for downside risks to the economic outlook. It is shown that the deterioration of the financial and real sides dramatically increases the probability of tail risks of large negative growth over the next year. A real-time measure of financial conditions and economic activity is proposed for the United States, and these measures are used to construct conditional quantiles and predictive distributions of average GDP growth over the next 12 months. It is found that periods of high macro and financial distress, such as the global financial crisis and the COVID-19 pandemic, are associated with low average future growth, high uncertainty, and risks tilted to the downside. This methodology is a powerful tool to assess the risk of tail events, such as recessions, and to evaluate the likelihood of point forecasts.
