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Risk aversion, uncertainty, and monetary policy: Structural vector autoregressions identified with high-frequency external instruments

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  • Jang, Woon Wook

Abstract

This study uses structural vector autoregression models to examine the monetary policy (MP) effects on risk aversion, uncertainty, and inflation. MP shocks are identified with high-frequency external instruments, rather than Cholesky decomposition. The instruments include asset price changes in the 30-minute window around FOMC announcements and their decomposition into three orthogonal factors. The impulse-response analysis results are consistent with the standard MP effects theory, unlike with the Cholesky decomposition method.

Suggested Citation

  • Jang, Woon Wook, 2020. "Risk aversion, uncertainty, and monetary policy: Structural vector autoregressions identified with high-frequency external instruments," Economics Letters, Elsevier, vol. 186(C).
    • Handle: RePEc:eee:ecolet:v:186:y:2020:i:c:s0165176519303374
    DOI: 10.1016/j.econlet.2019.108675
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    References listed on IDEAS

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    1. Bekaert, Geert & Hoerova, Marie & Lo Duca, Marco, 2013. "Risk, uncertainty and monetary policy," Journal of Monetary Economics, Elsevier, vol. 60(7), pages 771-788.
    2. Hahn, Jaehoon & Jang, Woon Wook & Kim, Seongjin, 2017. "Risk aversion, uncertainty, and monetary policy in zero lower bound environments," Economics Letters, Elsevier, vol. 156(C), pages 118-122.
    3. Mark Gertler & Peter Karadi, 2015. "Monetary Policy Surprises, Credit Costs, and Economic Activity," American Economic Journal: Macroeconomics, American Economic Association, vol. 7(1), pages 44-76, January.
    4. Jing Cynthia Wu & Fan Dora Xia, 2016. "Measuring the Macroeconomic Impact of Monetary Policy at the Zero Lower Bound," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 48(2-3), pages 253-291, March.
    5. Karel Mertens & Morten O. Ravn, 2013. "The Dynamic Effects of Personal and Corporate Income Tax Changes in the United States," American Economic Review, American Economic Association, vol. 103(4), pages 1212-1247, June.
    6. Gurkaynak, Refet S. & Sack, Brian & Wright, Jonathan H., 2007. "The U.S. Treasury yield curve: 1961 to the present," Journal of Monetary Economics, Elsevier, vol. 54(8), pages 2291-2304, November.
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    1. Leitner, Georg & Hübel, Teresa & Wolfmayr, Anna & Zerobin, Manuel, 2021. "How risky is Monetary Policy? The Effect of Monetary Policy on Systemic Risk in the Euro Area," Department of Economics Working Paper Series 312, WU Vienna University of Economics and Business.
    2. Sakshi Saini & Sanjay Sehgal & Florent Deisting, 2020. "Monetary Policy, Risk Aversion and Uncertainty in an International Context," Multinational Finance Journal, Multinational Finance Journal, vol. 24(3-4), pages 211-266, September.

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    More about this item

    Keywords

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    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • 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

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