Credit, Capital and Crises: A GDP-at-risk Approach

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.