A0781
Title: Estimating multivariate macroeconomic risk
Authors: Maximilian Schroder - European Central Bank (Germany) [presenting]
Abstract: Analyzing multivariate macro-financial risk is important to understand how economic shocks affect the probability of tradeoffs. This is particularly relevant for economic agents pursuing multiple objectives. The necessary tools are introduced to study the complex nature of joint macro-financial uncertainty and how structural economic shocks play a key role in shaping the risk outlook across multiple macro-financial aggregates. In addition, inspired by the finance literature, the framework allows summarizing the multivariate risk into simple risk measures that remain consistent with economic agents' preferences. The findings suggest that the effects of shocks are strongly heterogeneous depending on the economic environment and generally stronger in unstable times. In addition, if a shock drives variables of interest in opposite directions, then the effect of the economic shock on the overall balance of risk becomes ambiguous and strongly time-varying. In the case of monetary policy, if the policy is aimed at mitigating risks to the outlook, timing the policy response appropriately is key. A wait-and-see approach during the early recovery post-pandemic, coupled with more decisive action as the economy stabilized, is supported by the empirical results.
