When is Growth at Risk?


Plagborg-Møller, Mikkel, Lucrezia Reichlin, Giovanni Ricco, and Thomas Hasenzagl. 2020. “When is Growth at Risk?” Brookings Papers on Economic Activity 2020 (Spring): 167-229.


This paper empirically evaluates the potentially non-linear nexus between financial indicators and the distribution of future GDP growth, using a rich set of macroeconomic and financial variables covering 13 advanced economies. We evaluate the out-of-sample forecast performance of financial variables for GDP growth, including a fully real-time exercise based on a flexible non-parametric model. We also use a parametric model to estimate the moments of the time-varying distribution of GDP and evaluate their in-sample estimation uncertainty. Our overall conclusion is pessimistic: Moments other than the conditional mean are poorly estimated, and no predictors we consider provide robust and precise advance warnings of tail risks or indeed about any features of the GDP growth distribution other than the mean. In particular, financial variables contribute little to such distributional forecasts, beyond the information contained in real indicators.


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Last updated on 01/02/2021