Covid. Bank of Italy, 'GaR' model did not foresee a 2020 recession

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29 March 2021 In the face of the Coronavirus pandemic, the financial markets moved too late, at the beginning of the epidemic, to be able to give a forecast on the economic contraction that hit Italy in the first half of 2020 and to facing the economic recession caused by Covid-19. 

This was stated by a study by economists from the Bank of Italy in the latest issue of the series published by via Nazionale 'Notes on financial stability and supervision'.

In the case of the Covid pandemic, the growth model at risk, the GaRs adopted by numerous institutions did not work, the study highlights because the model failed to capture the economic contraction in the first half of 2020 as financial indicators provide information useful and timely on the likelihood of a recession over medium-term horizons.

The growth-at-risk model (GaR in English) links current financial conditions to the distribution of future growth results and makes it possible to assess whether a tightening or easing of financial conditions could jeopardize financial stability and future growth.

Since the risky growth model did not work in the face of an unpredictable event such as the Covid epidemic, the study's conclusion is that although 'GaRs' provide a useful description of extreme historical variations in economic activity, their forecasts should not be taken uncritically and directly used to calibrate preventive policy measures.