DP15088 Multimodality in Macro-Financial Dynamics

Author(s): Tobias Adrian, Nina Boyarchenko, Domenico Giannone
Publication Date: July 2020
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Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15088

We estimate the evolution of the conditional joint distribution of economic and financial conditions. While the joint distribution is approximately Gaussian during normal periods, sharp tightenings of financial conditions lead to the emergence of additional modes. The U.S. economy has historically resolved quickly to the "good" mode, but we conjecture that poor policy choices could lead to prolonged periods of multimodality. We argue that multimodality arises naturally in a macro-financial intermediary model with occasionally binding intermediary constraints.