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Financial uncertainty, risk aversion and monetary policy

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  • Nkwoma John Inekwe

    (Monash University)

Abstract

We estimate the response of uncertainty/risk aversion to monetary policy actions in both the financial sector and the aggregate economy using a structural vector autoregressive model. When compared with other sectors, our constructs reveal that financial risk aversion/uncertainty has greater correlation with the aggregate risk aversion and uncertainty. Our analysis reveals that financial risk aversion and uncertainty exhibit stronger interdependence with monetary policy actions than aggregate uncertainty and risk aversion. Tighter monetary policy induces risk aversion and uncertainty increment in both the financial sector and the aggregate market. However, the financial sector risk aversion and uncertainty responses are of greater magnitude.

Suggested Citation

  • Nkwoma John Inekwe, 2016. "Financial uncertainty, risk aversion and monetary policy," Empirical Economics, Springer, vol. 51(3), pages 939-961, November.
  • Handle: RePEc:spr:empeco:v:51:y:2016:i:3:d:10.1007_s00181-015-1036-6
    DOI: 10.1007/s00181-015-1036-6
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    Cited by:

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    2. Kurov, Alexander & Stan, Raluca, 2018. "Monetary policy uncertainty and the market reaction to macroeconomic news," Journal of Banking & Finance, Elsevier, vol. 86(C), pages 127-142.

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    More about this item

    Keywords

    Forecast; Variance; Risk; Uncertainty; Monetary policy;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • 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

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