Multimodality in Macro-Financial Dynamics
50 Pages Posted: 20 Nov 2019
Date Written: November 2019
We estimate the evolution of the conditional joint distribution of economic and financial conditions in the United States, documenting a novel empirical fact: while the joint distribution is approximately Gaussian during normal periods, sharp tightenings of financial conditions lead to the emergence of additional modes — that is, multiple economic equilibria. Although the U.S. economy has historically reverted quickly to a “good” equilibrium after a tightening of financial conditions, we conjecture that poor policy choices under these circumstances could also open a pathway to a “bad” equilibrium for a prolonged period. We argue that such multimodality arises naturally in a macro-financial intermediary model with occasionally binding intermediary constraints.
Keywords: density impulse response, multimodality, nonparametric density estimator
JEL Classification: C14, E17, E37, G01
Suggested Citation: Suggested Citation