A High-Dimensional GDP-at-Risk and Inflation-at-Risk for the Euro Area

Abstract

GDP-at-risk and Inflation-at-risk are standard measures of tail risk in modern macroeconometrics, adapted from tools originally developed in the financial risk management literature. In this paper, these indicators are estimated for the euro area and its Member States by leveraging a high-dimensional dataset in the construction of time-varying conditional distributions of GDP growth and inflation. The distributions obtained at country level are used to assess how the synchrony of euro-area countries’ business cycles has evolved since the introduction of the euro. The results indicate significant asymmetries in the balance between upside and downside risks for both GDP and inflation, and a persistently weak synchrony for the left tails of GDP growth distributions during episodes of crisis.

Keywords: GDP-at-risk, Inflation-at-risk, high-dimensional macroeconometrics

JEL Classification: E23, E27, E37, C58