Modeling and Forecasting Macroeconomic Downside Risk
100 Pages Posted: 18 Aug 2020 Last revised: 29 Mar 2022
Date Written: July 2020
We model permanent and transitory changes of the predictive density of US GDP growth. A substantial increase in downside risk to US economic growth emerges over the last 30 years, associated with the long-run growth slowdown started in the early 2000s. Conditional skewness moves procyclically, implying negatively skewed predictive densities ahead and during recessions, often anticipated by deteriorating financial conditions. Conversely, positively skewed distributions characterize expansions. The modelling framework ensures robustness to tail events, allows for both dense or sparse predictor designs, and delivers competitive out-of-sample (point, density and tail) forecasts, improving upon standard benchmarks.
Keywords: Business cycle, Downside risk, financial conditions, score driven models, Skewness
JEL Classification: C53, E32, E44
Suggested Citation: Suggested Citation