Macroeconomic downside risk and the effect of monetary policy

Chuang Deng and Jian Wu

Finance Research Letters, 2023, vol. 54, issue C

Abstract: This study examines the dynamic effects of different types of monetary policy instruments on macroeconomic downside risks using SV-TVP-VAR Model. That is, we expand the predictive information set to fit the distribution of China's economic growth rate and then evaluate China's macroeconomic downside risks directly by measuring the probability of economic downturns. We find that extreme crises make the economic growth distributions show low peaks and thick tails, and increase macroeconomic downside risks. Quantitative monetary policy can effectively mitigate macroeconomic downside risks in the short term. Price-based monetary policy plays a role in curbing excessive economic prosperity and reducing macroeconomic downside risks in the medium term, and its regulatory effect is more sustainable.

Keywords: Macroeconomic downside risk; Monetary policy; SV-TVP-VAR model (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:54:y:2023:i:c:s1544612323001769

DOI: 10.1016/j.frl.2023.103803

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