Policy Notes

Vulnerable growth in the Euro Area: Measuring the impact of the Covid through the lens of financial conditions.

Juan Manuel Figueres, commented by Marek Jarociński, April 2020.

We estimate the downside risk to output growth in the wake of the Coronavirus epidemics by looking at the historical relation between financial conditions and the subsequent GDP growth in the Euro Area across quantiles. Based on this relation, the recent tightening in financial conditions implies a qualitative change in the shape of the conditional output growth distribution. The downside risks increase massively, as captured e.g. by the increase of the Expected Shortfall from 0.76% to -10.4%. Even though this is a large increase in tail risks, the predictive density implied by this relation is quite benign compared with some forecasts based on real (as opposed to financial) variables.

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