Does risk matter more in recessions than in expansions? Implications for monetary policy

Martin M. Andreasen; Giovanni Caggiano; Efrem Castelnuovo; Giovanni Pellegrino

doi:10.1016/j.jmoneco.2023.10.014

Does risk matter more in recessions than in expansions? Implications for monetary policy

Martin M. Andreasen, Giovanni Caggiano, Efrem Castelnuovo^*, Giovanni Pellegrino

^*Corresponding author af dette arbejde

Publikation: Bidrag til tidsskrift/Konferencebidrag i tidsskrift /Bidrag til avis › Tidsskriftartikel › Forskning › peer review

Abstract

We employ a nonlinear vector autoregression and a non-recursive identification strategy to show that an equal-sized uncertainty shock generates a larger contraction in real activity when growth is low (as in recessions) than when growth is high (as in expansions). An estimated New Keynesian model with recursive preferences replicates these state-contingent responses when approximated to third order around its risky steady state due to a stronger upward nominal pricing bias in recessions than in expansions. Empirical evidence supports this state-contingent channel, and we show that it can greatly reduce the ability of systematic monetary policy to stabilize output during recessions.

Originalsprog	Engelsk
Artikelnummer	103533
Tidsskrift	Journal of Monetary Economics
Vol/bind	143
ISSN	0304-3932
DOI	https://doi.org/10.1016/j.jmoneco.2023.10.014
Status	Udgivet - apr. 2024

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10.1016/j.jmoneco.2023.10.014

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title = "Does risk matter more in recessions than in expansions? Implications for monetary policy",

abstract = "We employ a nonlinear vector autoregression and a non-recursive identification strategy to show that an equal-sized uncertainty shock generates a larger contraction in real activity when growth is low (as in recessions) than when growth is high (as in expansions). An estimated New Keynesian model with recursive preferences replicates these state-contingent responses when approximated to third order around its risky steady state due to a stronger upward nominal pricing bias in recessions than in expansions. Empirical evidence supports this state-contingent channel, and we show that it can greatly reduce the ability of systematic monetary policy to stabilize output during recessions.",

keywords = "New Keynesian model, Non-recursive identification, Nonlinear SVAR, Risky steady state, State-contingent uncertainty shock",

author = "Andreasen, {Martin M.} and Giovanni Caggiano and Efrem Castelnuovo and Giovanni Pellegrino",

note = "Publisher Copyright: {\textcopyright} 2023 Elsevier B.V.",

year = "2024",

month = apr,

doi = "10.1016/j.jmoneco.2023.10.014",

language = "English",

volume = "143",

journal = "Journal of Monetary Economics",

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TY - JOUR

T1 - Does risk matter more in recessions than in expansions? Implications for monetary policy

AU - Andreasen, Martin M.

AU - Caggiano, Giovanni

AU - Castelnuovo, Efrem

AU - Pellegrino, Giovanni

PY - 2024/4

Y1 - 2024/4

N2 - We employ a nonlinear vector autoregression and a non-recursive identification strategy to show that an equal-sized uncertainty shock generates a larger contraction in real activity when growth is low (as in recessions) than when growth is high (as in expansions). An estimated New Keynesian model with recursive preferences replicates these state-contingent responses when approximated to third order around its risky steady state due to a stronger upward nominal pricing bias in recessions than in expansions. Empirical evidence supports this state-contingent channel, and we show that it can greatly reduce the ability of systematic monetary policy to stabilize output during recessions.

AB - We employ a nonlinear vector autoregression and a non-recursive identification strategy to show that an equal-sized uncertainty shock generates a larger contraction in real activity when growth is low (as in recessions) than when growth is high (as in expansions). An estimated New Keynesian model with recursive preferences replicates these state-contingent responses when approximated to third order around its risky steady state due to a stronger upward nominal pricing bias in recessions than in expansions. Empirical evidence supports this state-contingent channel, and we show that it can greatly reduce the ability of systematic monetary policy to stabilize output during recessions.

KW - New Keynesian model

KW - Non-recursive identification

KW - Nonlinear SVAR

KW - Risky steady state

KW - State-contingent uncertainty shock

U2 - 10.1016/j.jmoneco.2023.10.014

DO - 10.1016/j.jmoneco.2023.10.014

M3 - Journal article

AN - SCOPUS:85177744506

SN - 0304-3932

VL - 143

JO - Journal of Monetary Economics

JF - Journal of Monetary Economics

M1 - 103533

ER -

Does risk matter more in recessions than in expansions? Implications for monetary policy

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