High and rising financial vulnerabilities can have an impact on future economic growth

News, Staff memo High and rapidly rising financial risks and vulnerabilities pose a greater risk of strongly negative economic growth in the future. This is illustrated by the Riksbank’s latest analysis of the Growth-at-Risk (GaR) risk measure. The Staff Memo “Quantifying systemic risks with Growth-at-Risk” by authors Dominika Krygier and Tamás Vasi is a follow-up to a Staff Memo from autumn 2021 and provides a more forward-looking analysis of downside risks using GaR.

To understand how high and rising financial risks and vulnerabilities can affect economic growth in the future, the authors have calculated the risk measure GaR one to three years ahead, based on current macro-financial conditions. These conditions are represented by the systemic risk indicator and aim to illustrate existing risks and vulnerabilities in the financial system. Among other things, the results show that the marginal effect of rising risks and vulnerabilities in the financial system is negative for GDP growth. They also show that financial crises can become both longer and deeper if they are preceded by rising financial risks and vulnerabilities. This means that the estimation of the risk measure GaR will be greater (more negative) when macro-financial conditions are taken into account.

GaR links a statistical approach with economic theory about the interaction between financial stability, macro-financial conditions and the real economy, and makes it possible to monitor how the risks of highly negative economic outcomes develop. In this way, GaR is a useful element in the analysis of financial risks and vulnerabilities, and in the discussion of how these can be managed.

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Updated 07/06/2022