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Monetary policy uncertainty and investor expectations

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  • Sinha, Arunima

Abstract

How does monetary policy uncertainty affect the behavior of market participants? In a New-Keynesian DSGE model with Epstein–Zin preferences, an increase in interest rate uncertainty is found to increase precautionary savings for households, and depress output, inflation and the short- and long-term asset yields. These effects are similar to a negative demand shock. The monetary policy uncertainty shock is calibrated using ex-ante uncertainty of investors about the future changes in Treasury yields, extracted from Options and Futures data. Incorporating the monetary policy uncertainty shock is also found to lower the term premium generated by the model, relative to the case without stochastic volatility in the interest rate rule.

Suggested Citation

  • Sinha, Arunima, 2016. "Monetary policy uncertainty and investor expectations," Journal of Macroeconomics, Elsevier, vol. 47(PB), pages 188-199.
    • Handle: RePEc:eee:jmacro:v:47:y:2016:i:pb:p:188-199
    DOI: 10.1016/j.jmacro.2015.12.001
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    More about this item

    Keywords

    Monetary policy uncertainty; Epstein-Zin preferences; DSGE;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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