A Structural Approach to Growth-at-Risk

TL;DR

This paper develops a structural method to analyze how financial shocks influence the lower quantiles of economic growth, revealing a more pronounced impact on growth-at-risk than previously identified.

Contribution

It introduces a novel approach to estimate structural impulse responses of unconditional quantiles, distinguishing treatment from control variables for clearer interpretation.

Findings

Financial shocks significantly affect lower output growth quantiles.

The estimated impact on growth-at-risk is more extreme than in prior research.

Methodology improves identification of causal effects in quantile responses.

Abstract

We identify the structural impulse responses of quantiles of the outcome variable to a shock. Our estimation strategy explicitly distinguishes treatment from control variables, allowing us to model responses of unconditional quantiles while using controls for identification. Disentangling the effect of adding control variables on identification versus interpretation brings our structural quantile impulse responses conceptually closer to structural mean impulse responses. Applying our methodology to study the impact of financial shocks on lower quantiles of output growth confirms that financial shocks have an outsized effect on growth-at-risk, but the magnitude of our estimates is more extreme than in previous studies.