Overall the gwi is shown to provide a narrative of

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economy. Overall, the GWI is shown to provide a narrative of events that have led to either slight or substantial increases in the weakness of the global economy. 4.2 Monitoring Global Risks In a recent work, Adrian et al. ( 2019 ) illustrate the importance of evaluating downside risks of U.S. output growth associated to tighter financial conditions. The authors rely on quantile regressions to model the conditional predictive densities of real activity. Thereafter, this methodology has also been applied to a wide variety of individual countries for macroeconomic surveillance purposes ( Prasad et al. ( 2019 )). Assessing the likelihood of upcoming extreme events, or “macroeconomic disasters”, given the current conditions, is crucial for policymakers. Although, this task becomes more challenging when the target to be monitored is the world economy, as a whole. This is due to the lack of, relatively, high frequency economic data at the world level. In this section, we employ the proposed GWI as a tool for monitoring risks at the global level and in real-time. Also, due to the way in which the GWI is constructed, it is straightforward to provide timely assessments about two important features of the world economy. First, the evaluation of risks associated to a state of low global activity. Second, the regional contributions ECB Working Paper Series No 2381 / March 2020 21
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associated to such risks. Figure 7 shows the weakness stance of the global economy during four selected periods. First, Chart A shows the situation at the beginning of the last global recession (2008M03), where most of the mass of the GWI distribution started to displace towards the right, suggesting an upcoming weakening of the global economy. Also, corresponding the radar chart indicates that most of such a weakening was originated in the U.S. economy. Chart B shows the same type of information, but for a period around the middle of the last global recession (2009M01), where most of the mass of the GWI distribution was compressed at values close to one, indicating a severe global downturn. The associated radar chart reveals that the GWI composition in this period was relatively homogeneous between the largest world economies, that is, U.S., the Euro Area and China, due to the international propagation of contractionary shocks. Chart C shows the global risk assessment during a period of buoyant recovery (2009M12), which is reflected in GWI distribution, concentrated in values close to zero. Interestingly, not only the U.S. and the Euro Area were the drivers of this trend, but also the economies of Japan and Russia significantly contributed. Lastly, Chart D plots the current situation (2020M02), which suggests increasing risks of high level of global weakness, with China being the main driver due to the coronavirus outbreak.
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  • Fall '19
  • Economics, Recession, Late-2000s recession, GWI

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