Financial Conditions and Macroeconomic Downside Risks in the Euro Area

52 Pages Posted: 26 Jan 2022

Date Written: January 2022

Abstract

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

Lhuissier, Stéphane, Financial Conditions and Macroeconomic Downside Risks in the Euro Area (January 2022). Banque de France Working Paper No. 863, Available at SSRN: https://ssrn.com/abstract=4018303 or http://dx.doi.org/10.2139/ssrn.4018303

Stéphane Lhuissier (Contact Author)

Banque de France ( email )

Paris
France

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