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The Response of Monetary Policy to Uncertainty: Theory and Empirical Evidence for the US

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  • Christopher Martin

    (Brunel University)

  • Costas Milas

    ()
    (Keele University, Centre for Economic Research and School of Economic and Management Studies)

Abstract

This paper developes a theoretical model to analyse the impact of uncertainty about the true state of the economy on monetary policy. The theoretical model is tested on US data since the early 1980s. Our estimates suggest that the effect of uncertainty on interest rates was most marked in 1983, when uncertainty increased interest rates by up to 140 basis points, in 1990-91, when uncertainty reduced interest rates by up to 80 basis points and in 1996-2001 when uncertainty reduced interest rates by up to 70 basis points over five years.

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File URL: http://www.keele.ac.uk/depts/ec/wpapers/kerp0615.pdf
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Bibliographic Info

Paper provided by Centre for Economic Research, Keele University in its series Keele Economics Research Papers with number KERP 2006/15.

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Length: 32 pages
Date of creation: Jul 2005
Date of revision: Aug 2006
Handle: RePEc:kee:kerpuk:2006/15

Note: We thank seminar audiences at Brunel, Cambridge and Loughborough Universities and at Cass Business School for their comments.
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Postal: Department of Economics, University of Keele, Keele, Staffordshire, ST5 5BG - United Kingdom
Phone: +44 (0)1782 584581
Fax: +44 (0)1782 717577
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Web page: http://www.keele.ac.uk/depts/ec/cer/
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Postal: Centre for Economic Research, Research Institute for Public Policy and Management, Keele University, Staffordshire ST5 5BG - United Kingdom
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Web: http://www.keele.ac.uk/depts/ec/cer/pubs_kerps.htm

Related research

Keywords: Monetary Policy; Uncertainty;

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