Growth at Risk and Financial Stability

Growth at Risk (GaR) provides a methodology for understanding how financial conditions and the level of financial vulnerabilities contribute to the possibility of future episodes of weak economic growth. Using the GaR framework, we show that the likelihood and severity of future weak or negative economic growth in Ireland rises during periods where risks to financial stability are growing. In particular, we show that near term tail risks are heavily influenced by prevailing financial market conditions, but that medium horizon risks are more dependent upon systemic financial vulnerabilities, such as when credit growth is excessive. Our empirical analysis also suggests that structural characteristics of Ireland’s economy or financial system make it more exposed to potential weak growth outcomes, compared with other countries in our sample. We discuss how macroprudential policy can be better informed by tracking developments in the severity and likelihood of weak or negative economic outcomes made possible by a GaR framework.