How do policies influence GDP tail risks?


OECD Economics Department Working Papers

Working papers from the Economics Department of the OECD that cover the full range of the Department’s work including the economic situation, policy analysis and projections; fiscal policy, public expenditure and taxation; and structural issues including ageing, growth and productivity, migration, environment, human capital, housing, trade and investment, labour markets, regulatory reform, competition, health, and other issues.

The views expressed in these papers are those of the author(s) and do not necessarily reflect those of the OECD or of the governments of its member countries.


How do policies influence GDP tail risks?

This paper explores the relationship between policy settings and extreme positive and negative growth events, what we call GDP tail risks, using quantile regression methods. Conditioning on several country characteristics such as the size, stage of development and openness to trade as well as macroeconomic policies, the following findings for a panel of mostly OECD countries emerge: First, countries with stronger banking supervision and capital market development, better quality of governance, higher foreign reserves and several labour market characteristics such as higher unemployment benefits and greater spending in active labour market policies tend to experience less severe negative growth shocks (negative tail risk). Second, greater use of macro-prudential tools is generally associated with less extreme positive growth shocks (positive tail risk) and lower average growth. Third, larger automatic stabilisers are associated with both less severe negative and positive growth shocks but also lower average growth.


English

Keywords: growth, financial stability, quantile regression

JEL:
F43: International Economics / Macroeconomic Aspects of International Trade and Finance / Economic Growth of Open Economies;
E32: Macroeconomics and Monetary Economics / Prices, Business Fluctuations, and Cycles / Business Fluctuations; Cycles;
C22: Mathematical and Quantitative Methods / Single Equation Models; Single Variables / Single Equation Models; Single Variables: Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes;
E44: Macroeconomics and Monetary Economics / Money and Interest Rates / Financial Markets and the Macroeconomy;
F3: International Economics / International Finance