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Federal Reserve Bank of New York
Staff Reports
Multimodality in Macro-Financial Dynamics
Tobias Adrian
Nina Boyarchenko
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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Tobias Adrian & Nina Boyarchenko & Domenico Giannone, Multimodality in Macro-Financial Dynamics, Federal Reserve Bank of New York, Staff Reports 903, 01 Nov 2019.
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Keywords: density impulse response; multimodality; nonparametric density estimator
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