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The effects of monetary policy on macroeconomic risk

Author

Listed:
  • Forni, Mario
  • Gambetti, Luca
  • Maffei-Faccioli, Nicolò
  • Sala, Luca

Abstract

Monetary policy expansions significantly reduce macroeconomic downside risk, measured as the difference between the median and the 5th percentile of the industrial production growth forecast distribution. However, the effects are smaller in magnitude than those of credit spread shocks, which we find to be a major driver of fluctuations in downside risk. As a consequence, large policy interventions are required to stabilize risk originating from the financial sector, with undesirable consequences in terms of both price and output stability. These findings are obtained using US data and a novel econometric approach which combines quantile regressions and Structural VAR analysis.

Suggested Citation

  • Forni, Mario & Gambetti, Luca & Maffei-Faccioli, Nicolò & Sala, Luca, 2024. "The effects of monetary policy on macroeconomic risk," European Economic Review, Elsevier, vol. 167(C).
    • Handle: RePEc:eee:eecrev:v:167:y:2024:i:c:s0014292124001181
    DOI: 10.1016/j.euroecorev.2024.104789
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    References listed on IDEAS

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    Cited by:

    1. Emter, Lorenz & Setzer, Ralph & Zorell, Nico & Moura, Afonso S., 2024. "Monetary policy and growth-at-risk: the role of institutional quality," Working Paper Series 2989, European Central Bank.

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    More about this item

    Keywords

    Macroeconomic risk; Uncertainty; Skewness; Forecast distribution; SVAR; Credit spreads shocks; Monetary policy shocks; Quantile regressions;
    All these keywords.

    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
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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