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Uncertainty shocks, central bank characteristics and business cycles

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  • Yıldırım-Karaman, Secil

Abstract

This paper investigates the conjecture that central bank independence and transparency moderate the negative effect of uncertainty shocks on real output. To test this conjecture, the real GDP growth rate is regressed on the interaction terms between measures of central bank characteristics and the proxy for macroeconomic uncertainty, i.e. stock market volatility. To address potential endogeneity concerns, stock market volatility is instrumented in a Two Stage Least Squares model by plausibly exogenous natural disaster, terrorist attack, political coup and revolution shocks. The estimation results provide strong evidence that central bank independence reduces the adverse effect of uncertainty shocks. There is also evidence for the moderating impact of transparency. However, due to the limited availability of transparency data, the result is less conclusive.

Suggested Citation

  • Yıldırım-Karaman, Secil, 2017. "Uncertainty shocks, central bank characteristics and business cycles," Economic Systems, Elsevier, vol. 41(3), pages 379-388.
    • Handle: RePEc:eee:ecosys:v:41:y:2017:i:3:p:379-388
    DOI: 10.1016/j.ecosys.2016.09.004
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    More about this item

    Keywords

    Uncertainty; Volatility shocks; Business cycles; Central bank independence; Central bank transparency;
    All these keywords.

    JEL classification:

    • E00 - Macroeconomics and Monetary Economics - - General - - - General
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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