Financial Conditions and Macroeconomic Downside Risks in the Euro Area
52 Pages Posted: 26 Jan 2022
Date Written: January 2022
Motivated by empirically characterizing the relationship between financial conditions and downside macroeconomic risks in the euro area, I develop a regime-switching skew-normal model with time-varying probabilities of transitions. Using Bayesian methods, the model estimates show that a strong cyclical pattern emerges from the conditional skewness (a measure of the asymmetry of the predictive distribution), which has a tendency to rapidly decline to negative territory prior and during recessions. However, the inclusion of financial-specific information in time-varying probabilities does not help to anticipate such skewness nor more generally to provide advance warnings of tail risks.
Keywords: Financial Conditions, Downside Risks, Predictability, Regime-Switching Models
JEL Classification: C11; C2; E32
Suggested Citation: Suggested Citation