The Term Structure of Growth-at-Risk

Abstract

Using panel quantile regressions for 11 advanced and 10 emerging market economies, weshow that the conditional distribution of GDP growth depends on financial conditions, withgrowth-at-risk (GaR)-defined as growth at the lower 5th percentile-more responsive thanthe median or upper percentiles. In addition, the term structure of GaR features anintertemporal tradeoff: GaR is higher in the short run; but lower in the medium run wheninitial financial conditions are loose relative to typical levels, and the tradeoff is amplified bya credit boom. This shift in the growth distribution generally is not incorporated whensolving dynamic stochastic general equilibrium models with macrofinancial linkages, whichsuggests downside risks to GDP growth are systematically underestimated.

Keywords: Financial stability, downside risk, macrofinancial linkages, volatility paradox, quantile regression, General, International Business Cycles

JEL Classification: G10, E10, F44