Monitoring Joint Tail Risks: An Application to Growth and Inflation

Abstract

This paper develops the concept of Growth and Inflation at Risk frontier (GIaR). This is a bivariate generalisation of the concepts of Growth-at-Risk (GaR) and Inflation-at-Risk (IaR). We propose a novel approach to identify and estimate GIaR and provide uniformly valid upper and lower confidence bands. We first apply our procedure to predict the conditional probability of stagflation. Second, we compute worst-case scenarios for a policy maker who is concerned about the joint tail risk of low growth and high inflation, and we also study the effect that a tightening of financial conditions has on the joint tail risks.

Keywords: GIaR, Iso-Curve, Joint Exceedance, Location-Scale, Stagflation, Worst-case scenario

JEL Classification: C14, C32, E27, E66