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Monetary Policy Uncertainty And Economic Fluctuations

Author

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  • Drew D. Creal
  • Jing Cynthia Wu

Abstract

We investigate the relationship between uncertainty about monetary policy and its transmission mechanism, and economic fluctuations. We propose a new term structure model where the second moments of macroeconomic variables and yields can have a first†order effect on their dynamics. The data favor a model with two unspanned volatility factors that capture uncertainty about monetary policy and the term premium. Uncertainty contributes negatively to economic activity. Two dimensions of uncertainty react in opposite directions to a shock to the real economy, and the response of inflation to uncertainty shocks varies across different historical episodes.

Suggested Citation

  • Drew D. Creal & Jing Cynthia Wu, 2017. "Monetary Policy Uncertainty And Economic Fluctuations," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 58(4), pages 1317-1354, November.
    • Handle: RePEc:wly:iecrev:v:58:y:2017:i:4:p:1317-1354
    DOI: 10.1111/iere.12253
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    JEL classification:

    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates

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