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Holding the Economy by the Tail: Analysis of Short- and Long-run Macroeconomic Risks

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  • Michal Franta
  • Jan Libich

Abstract

We put forward a novel macro-financial empirical modelling framework that can examine the tails of distributions of macroeconomic variables and the implied risks. It does so without quantile regression, also allowing for non-normal distributions. Besides methodological innovations, the framework offers a number of relevant insights into the effects of monetary and macroprudential policy on downside macroeconomic risk. This is both from the short-run perspective and from the long-run perspective, which has been remained unexamined in the existing Macro-at-Risk literature. In particular, we estimate the conditional and unconditional US output growth distribution and investigate the evolution of its first four moments. The short-run analysis finds that monetary policy and financial shocks render the conditional output growth distribution asymmetric, and affect downside risk over and above their impact on the conditional mean that policymakers routinely focus on. The long-run analysis indicates, among other things, that US output growth left-tail risk showed a general downward trend in the two decades preceding the Global Financial Crisis, but has started rising in recent years. Our examination strongly points to post-2008 unconventional monetary policies (quantitative easing) as a potential source of elevated long-run downside tail risk.

Suggested Citation

  • Michal Franta & Jan Libich, 2021. "Holding the Economy by the Tail: Analysis of Short- and Long-run Macroeconomic Risks," Working Papers 2021/3, Czech National Bank, Research and Statistics Department.
    • Handle: RePEc:cnb:wpaper:2021/3
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    More about this item

    Keywords

    Downside tail risk; growth-at-risk; macroeconomic policy; macro-financial modeling; non-normal distribution; threshold VAR; US output growth;
    All these keywords.

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • C54 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Quantitative Policy Modeling
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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