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The effects of monetary policy on macroeconomic downside risk: state-dependence matters

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  • Barci, Giovanni

Abstract

I study the dynamic causal relationship between monetary policy and macroeconomic downside risk, focusing on structural asymmetries in recessions and expansions. I find that a monetary easing during economic slowdowns reduces downside risk by about twice as much as a monetary tightening during booms increases it. If this asymmetry is not properly accounted for, it could lead to an overly cautious behaviour by policymakers when tightening during booms; the conclusion also holds when considering monetary contractions occurring during highly-leveraged expansions. Results align with theoretical models that include a financial accelerator mechanism. I obtain evidence by building downside risk indicators as linear combinations of relevant quantiles of the conditional forecast density of output growth. Generalised state-dependent impulse response functions to structural shocks of quantiles linear combinations are recovered using a novel econometric framework that mixes structural VAR and quantile regressions, both adapted to accommodate smooth-transition parameters.

Suggested Citation

  • Barci, Giovanni, 2025. "The effects of monetary policy on macroeconomic downside risk: state-dependence matters," Journal of Economic Dynamics and Control, Elsevier, vol. 180(C).
    • Handle: RePEc:eee:dyncon:v:180:y:2025:i:c:s0165188925001678
    DOI: 10.1016/j.jedc.2025.105201
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    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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