Systemic Risk, Aggregate Demand, and Commodity Prices

The paper presents a global model with systemic and country risks, as well as commodity prices.Weshow that systemic risk shocks have an important impact on world economic activity, with the busts inworld output gap corresponding to unobserved systemic risk associated with major financial events. Inaddition, systemic risk shocks are shown to be important drivers of output gaps while country riskpremium shocks can have important effects on the trade balance. Commodity prices, in particular theprice of oil, are shown to be demand driven. The model performs well at one- and four-quarter horizonscompared to a survey of analysts' forecasts. In addition, systemic risk shocks explain a large share of theforecast variance for the world output gap, country output gaps, the price of oil, and country riskpremiums. The importance of systemic risk shocks lends support for financial surveillance with asystemic focus.