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