Assessing Macroeconomic Tail Risk

47 Pages Posted: 10 Jan 2022

See all articles by Francesca Loria

Francesca Loria

Board of Governors of the Federal Reserve System

Christian Matthes

Federal Reserve Bank of Richmond

Donghai Zhang

Institute for Macroeconomics and Econometrics - University of Bonn

Multiple version iconThere are 3 versions of this paper

Date Written: January 6, 2022

Abstract

Real GDP and industrial production in the US feature substantial tail risk. While this fact is well documented, several questions remain unanswered. Is this asymmetry driven by a specific structural shock? No. We show that the 10th percentile of the predictive growth distributions responds about three times more than the median to \emph{both} monetary policy and financial shocks. What mechanism can generate this asymmetry in the data? We discuss nonlinear VAR models and a nonlinear equilibrium model that are capable of matching our empirical findings. Furthermore, we provide empirical evidence that allows us to differentiate between two competing theories.

Keywords: Macroeconomic Risk, Shocks, Local Projections

JEL Classification: C21, C53, E30, E37

Suggested Citation

Loria, Francesca and Matthes, Christian and Zhang, Donghai, Assessing Macroeconomic Tail Risk (January 6, 2022). Available at SSRN: https://ssrn.com/abstract=4002665 or http://dx.doi.org/10.2139/ssrn.4002665

Francesca Loria (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Christian Matthes

Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

Donghai Zhang

Institute for Macroeconomics and Econometrics - University of Bonn ( email )

Bonn
Germany

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