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Does U.S. Monetary Policy Respond to Macroeconomic Uncertainty?

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  • Thomas Gomez
  • Giulia Piccillo

Abstract

We find that macroeconomic uncertainty plays a significant role in U.S. monetary policy. First, we construct a measure of uncertainty as felt by policymakers at the time of making their rate-setting decisions. This measure is derived from a real-time, Bayesian estimation of a small monetary VAR with time-varying parameters. We use it to calculate the probability of being in a high-uncertainty regime. Second, we estimate a monetary policy reaction function that, apart from macroeconomic uncertainty, includes Greenbook forecasts, revisions of those forecasts, and a measure of stock market volatility. Using data for the period 1969 - 2008, we find that policymakers set an interest rate that is significantly lower in a high-uncertainty regime, compared to a low-uncertainty regime.

Suggested Citation

  • Thomas Gomez & Giulia Piccillo, 2023. "Does U.S. Monetary Policy Respond to Macroeconomic Uncertainty?," CESifo Working Paper Series 10407, CESifo.
    • Handle: RePEc:ces:ceswps:_10407
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    More about this item

    Keywords

    monetary policy; uncertainty; real-time data; Bayesian VAR; time-varying coefficients;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E01 - Macroeconomics and Monetary Economics - - General - - - Measurement and Data on National Income and Product Accounts and Wealth; Environmental Accounts
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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