Adaptive Risk Preferences: Unraveling the Impact of Monetary Policy on Output

Abstract We introduce a novel approach for measuring time variation in habit-based preferences using distress risk premia and apply it to estimate empirical targets for calibrating models that link such preferences to the output gap. Employing a popular model that integrates macroeconomic dynamics with habit-based preferences, we find that distress risk premia align most closely with a specification where a 1% monetary policy shock reduces output by 0.6%, reaching its trough after three quarters. These estimates are, however, sensitive to the specific moments of the preference dynamics chosen as calibration targets. Our findings are relevant for recent studies that rely on the preference-output gap link to induce hump-shaped output responses to monetary policy shocks.