Giovanni Caggiano

Thematic seminars
Macro and labor market seminar

Giovanni Caggiano

University of Padua
Why does risk matter more in recessions than in expansions?
Joint with
M. Andreasen, E. Castelnuovo, G. Pellegrino

IBD Salle 16

Îlot Bernard du Bois - Salle 16

5-9 boulevard Maurice Bourdet
13001 Marseille

Tuesday, May 23 2023| 12:30pm to 1:30pm

Andreas Dibiasi: andreas.dibiasi[at]
Céline Poilly: celine.poilly[at]


This paper uses a nonlinear vector autoregression and a non-recursive identification strategy to show that an equal-sized uncertainty shock generates a larger contraction in real activity when growth is low (as in recessions) than when growth is high (as in expansions). We show that an estimated New Keynesian model with recursive preferences can replicate these state-dependent responses when approximated to third order around its risky steady state. In the model, the key mechanism behind this result is that .rms display a stronger upward nominal pricing bias in recessions than in expansions because recessions imply higher inflation volatility and higher marginal utility of consumption than expansions. We provide empirical support for this state-dependent channel and show that it can significantly reduce the effectiveness of systematic monetary policy during recessions.

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