Assessing Macroeconomic Tail Risk

53 Pages Posted: 10 Jan 2022 Last revised: 17 Apr 2023

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; National University of Singapore (NUS), Department of Economics

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Date Written: April 14, 2023

Abstract

Real GDP and industrial production in the US display substantial asymmetry and tail risk. Is this asymmetry driven by a specific structural shock? Our empirical approach, based on quantile regressions and local projections, suggests otherwise. We find that the 10th percentile of predictive growth distributions responds between three and six times more than the median to monetary policy shocks, financial shocks, uncertainty shocks, and oil price shocks, indicating a common transmission mechanism. We present two data-generating processes that are capable of matching this finding: A threshold VAR model and a nonlinear equilibrium model.

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 (April 14, 2023). 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

National University of Singapore (NUS), Department of Economics ( email )

Singapore
Singapore

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