Economic Vulnerability Is State Dependent

38 Pages Posted: 20 Apr 2021

See all articles by Leopoldo Catania

Leopoldo Catania

Aarhus University - School of Business and Social Sciences; Aarhus University - CREATES

Alessandra Luati

University of Bologna - Department of Statistics

Pierluigi Vallarino

Aarhus University - School of Business and Social Sciences; Aarhus University - CREATES

Date Written: April 7, 2021

Abstract

This paper shows that different states of the financial system command a different effect in worsening financial conditions on economic vulnerability. As soon as financial conditions start deteriorating, the economic outlook becomes more pessimistic and uncertain. No increase in macroeconomic uncertainty is expected when financial conditions worsen from an already tighter than usual situation. We also find that past information on GDP growth is paramount to study and predict economic vulnerability. Both these findings have relevant forecasting and policymaking implications, and persist once we consider other measures of the real economic activity.

From a methodological perspective, we carry out the analysis under a novel approach which relies on the state of the art in dynamic modelling of multiple quantiles. The proposed methodology exploits the entire information of past GDP growth, can accommodate a state dependent effect of financial conditions and allows for statistical inference under the standard quasi maximum likelihood setting.

Keywords: Economic Vulnerability, Macro-Financial Linkages, Growth-at-Risk, Score Driven Models

Suggested Citation

Catania, Leopoldo and Luati, Alessandra and Vallarino, Pierluigi, Economic Vulnerability Is State Dependent (April 7, 2021). Available at SSRN: https://ssrn.com/abstract=3821668

Leopoldo Catania (Contact Author)

Aarhus University - School of Business and Social Sciences ( email )

Fuglesangs Allé 4
Aarhus V, DK-8210
Denmark
+4587165536 (Phone)

HOME PAGE: http://pure.au.dk/portal/en/leopoldo.catania@econ.au.dk

Aarhus University - CREATES ( email )

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

Alessandra Luati

University of Bologna - Department of Statistics ( email )

Bologna, 40126
Italy

Pierluigi Vallarino

Aarhus University - School of Business and Social Sciences ( email )

Nordre Ringgade 1
Aarhus C, DK-8000
Denmark

Aarhus University - CREATES ( email )

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

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