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 for this work

Research output: Contribution to journal/Conference contribution in journal/Contribution to newspaper › Journal article › Research › peer-review

4 Citations (Scopus)

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.

Original language	English
Article number	103533
Journal	Journal of Monetary Economics
Volume	143
ISSN	0304-3932
DOIs	https://doi.org/10.1016/j.jmoneco.2023.10.014
Publication status	Published - Apr 2024

Keywords

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

Access to Document

10.1016/j.jmoneco.2023.10.014

Cite this

@article{8c25306440114c0882f6913cad60a274,

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",

issn = "0304-3932",

publisher = "Elsevier B.V.",

}

Does risk matter more in recessions than in expansions? Implications for monetary policy. / Andreasen, Martin M.; Caggiano, Giovanni; Castelnuovo, Efrem et al.
In: Journal of Monetary Economics, Vol. 143, 103533, 04.2024.

Research output: Contribution to journal/Conference contribution in journal/Contribution to newspaper › Journal article › Research › peer-review

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

Abstract

Keywords

Access to Document

Fingerprint

Cite this