‘Sharp tightening’ can create multiple equilibria – New York Fed paper

Tobias Adrian
Tobias Adrian
Photo: John Harrington

Non-linear interactions between the financial sector and real economy can create dynamics that trap the economy in a “bad equilibrium”, research published by the New York Fed finds.

Tobias Adrian, Nina Boyarchenko, and Domenico Giannone note these non-linearities are difficult to pin down, as they are often model-specific and there is no agreement among economists as to which approach is the right one. As such, they adopt a non-parametric approach, which allows the data to speak for itself

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