Work

The global financial cycle and macroeconomic tail risks

Year: 2025

Type: article

Abstract: We study the link between the global financial cycle and macroeconomic tail risks using quantile vector autoregressions. Contractionary shocks to financial conditions and monetary policy in the United States cause elevated downside risks to growth around the world. By tightening financial conditions globally, these shocks affect the left tail of the conditional output growth distribution more strongly than the center of the distribution. This effect is particularly pronounced for countries with less flexible exchange rate arrangements, higher foreign currency exposures, and higher levels of private sector leverage, suggesting that exchange rate policies and macroprudential policies can mitigate downside risks to growth. • Contractionary shocks to U.S. financial conditions and monetary policy raise down-side risks to growth around the world. • The left tail of the conditional output growth distribution responds more strongly. • Effects are particularly strong for countries with less flexible exchange rates, higher foreign currency exposures, and higher levels of private sector leverage.

Source: Journal of International Money and Finance

DOI: 10.1016/j.jimonfin.2025.103342

Authors: Johannes Beutel, Lorenz Emter, Norbert Metiu, Esteban Prieto, Yves Schüler

Institutions: Deutsche Bundesbank, European Central Bank, Trinity College Dublin, Halle Institute for Economic Research

Language: English

Topic: Global Financial Crisis and Policies

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

SDG: Decent work and economic growth

Open Access status: hybrid

Estimated APC paid: $3,130