Growth-at-Risk for macroprudential policy stance assessment: a survey

Tihana Škrinjarić

How effective is macroprudential policy and how should policymakers measure its stance? My recent paper surveys the literature on the topic of Growth-at-Risk (GaR), which has been developed as a methodology to provide answers to these questions by relating the effects of macroprudential policy tools to real-economy dynamics. While the results are mixed, the consensus finds a positive impact from macroprudential policy tightening during the expansion of the financial cycle. Policy loosening reduces the potential GDP losses during contractions, with the effects being more prominent in the medium term. Several challenges within this framework still exist. Resolving these would lead to a more accurate evaluation of macroprudential policy effectiveness. Finally, I discuss GaR policy applications.

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The challenges of measuring financial conditions

Natalie Burr

The challenge of measuring financial conditions

Imagine you were tasked with thinking about how financial conditions have changed over a policy tightening cycle. Different economists would come to very different conclusions, and none would necessarily be wrong. Why? Because measuring financial conditions is challenging – for a variety of reasons. A financial conditions index (FCI) is a common solution, and its advantage lies in the disadvantage of the alternative: it is simpler than making a judgement across a range of individual variables. In this post, I propose one method to create a UK FCI. I find that financial conditions have tightened significantly over the past two years, coming from a period of accommodative conditions following Covid.

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Capital flights during Covid-19

Fernando Eguren-Martin, Cian O’Neill, Andrej Sokol and Lukas von dem Berge

While planes were grounded, capital flew out of emerging market economies in response to the acceleration in the spread of the virus in the early stages of the Covid-19 pandemic. Was this capital flight predictable once you account for the sudden deterioration in the global financial environment? In this post we present a model that helps to think about how financial conditions and international capital flows are linked. We then apply this methodology to events observed between March and May 2020, and find that the model predicted a large increase in the likelihood of capital flight. However, the scale of outflows was abnormally large even once the sharp tightening in financial conditions is accounted for.

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How financial variables can help in identifying the output gap in the UK

Marko Melolinna.

Like in most advanced economies, output fell significantly in the UK in the aftermath of the financial crisis. There is an ongoing debate on to what extent this fall could be explained by output having grown above its sustainable level; in other words, was there a positive output gap before the crisis? I argue that using financial market indicators in addition to more traditional macroeconomic variables to explain output fluctuations helps in constructing a consistent real-time narrative of a positive pre-crisis output gap in the UK.

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