DP15864 Credit, capital and crises: a GDP-at-Risk approach

Author(s):	David Aikman, Jonathan Bridges, Sinem Hacioglu Hoke, Cian O'Neill, Akash Raja
Publication Date:	March 2021
Keyword(s):	Financial Stability, GDP-at-Risk, local projections, macroprudential policy, quantile regressions
JEL(s):	G01, G18, G21
Programme Areas:	Financial Economics
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=15864

Using quantile regressions applied to a panel dataset of 16 advanced economies, we examine how downside risk to growth over the medium term is affected by a set of macroprudential indicators. We find that credit and property price booms, and wide current account deficits increase downside risks 3 to 5 years ahead. However, such downside risks can be partially mitigated by increasing the capital ratio of the banking system. We show that GDP-at-Risk, defined as the the 5th quantile of the projected GDP growth distribution three years ahead, deteriorated in the US in the run-up to the Global Financial Crisis, driven by rapid growth in credit and house prices alongside a widening current account deficit. Our results suggest such indicators could provide useful information for the stance of macroprudential policy.