The time-varying risk of Italian GDP

The uncertainty surrounding economic forecasts is generally related to multiple sources of risks, of domestic and foreign origin. This paper studies the predictive distribution of the Italian GDP growth as a function of selected risk indicators, related to both financial and real economic developments. The conditional distribution of GDP growth is characterized by means of expectile regressions. Expectiles are closely related to the Expected Shortfall, which is here decomposed in terms of contributions of different risk factors. Our analysis confirms that financial conditions are relevant for the left tail of the predictive distribution and it highlights how indicators of global trade and uncertainty have explanatory power for both tails. Overall, our findings suggest that Italian GDP risks have been mostly driven by foreign developments around the Great Recession, by domestic financial conditions at the time of the Sovereign Debt Crisis and by economic policy uncertainty in more recent years.