Staff Reports
Multimodality in Macro-Financial Dynamics
Number 903
November 2019

JEL classification: C14, E17, E37, G01

Authors: Tobias Adrian, Nina Boyarchenko, and Domenico Giannone

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.

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AUTHOR DISCLOSURE STATEMENT(S)
Tobias Adrian
I declare that I have no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.

Nina Boyarchenko
I declare that I have no relevant or material financial interests that relate to the research described in this paper.

Domenico Giannone
I declare that I have no relevant or material financial interests that relate to the research described in this paper.