The effect of financial conditions on the distribution of GDP growth

Abstract

This thesis explores the relationship between financial stability and economic growth in the United States, the Euro Zone, Argentina, Brazil, and India over the past two decades. A central component of this research involves the development of a Financial Conditions Index (FCI) for each of these economies. Through econometric estimation of real GDP growth's time-varying distribution over the study period, this research unveils the impact of tight financial conditions on economic growth. In this thesis, I demonstrate that financial conditions not only significantly influence average GDP growth but also shape its distribution over time. In fact, periods of tight financial conditions are associated with increased overall economic growth uncertainty and a higher likelihood of extreme negative realizations in economic growth. This thesis underscores the pivotal role of financial conditions in magnifying negative risks concerning economic growth, both within the sample and out of the sample. It emphasizes the unique dynamics between financial stability and economic growth, highlighting interesting implications for both theoretical macroeconomic models and policymaking.

Date of Award	17 Oct 2023
Original language	English
Awarding Institution	Universidade Católica Portuguesa
Supervisor	Joana Silva (Supervisor)