No. 24 - Growth-at-risk in Italy during the covid-19 pandemic

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by Piergiorgio Alessandri and Antonio Di CesareMarch 2021

Overview

This note investigates whether financial markets can help in predicting extreme macroeconomic outcomes associated with very rare events using the first outbreak of the COVID-19 pandemic in Italy as a case study. The 'growth-at‑risk' (GAR) models we examine miss the economic contraction the country experienced in the first half of 2020. The reason is that the financial markets moved too late to have an impact on the forecasts, even at relatively short horizons. Our results suggest that, while GaR models provide a useful description of historical tail dynamics for economic activity, their forecasts should not be taken at face value and directly employed to calibrate pre-emptive policy actions.

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