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Uncertainty and Monetary Policy during the Great Recession

Author

Listed:
  • Giovanni Pellegrino

    (Department of Economics and Business Economics, Aarhus University)

  • Efrem Castelnuovo

    (University of Padova)

  • Giovanni Caggiano

    (Monash University and University of Padova)

Abstract

We employ a nonlinear VAR framework and a state-of-the-art identification strategy to document the large response of real activity to a financial uncertainty shock during and in the aftermath of the great recession. We replicate this evidence with an estimated DSGE framework featuring a concept of uncertainty comparable to that in our VAR. We then use the estimated framework to quantify the output loss due to the large uncertainty shock that materialized in 2008Q3. We find such a shock to be able to explain about 60% of the output loss in the 2008-2014 period. The same estimated model unveils the role successfully played by the Federal Reserve in limiting the output loss that would otherwise have occurred had monetary policy been conducted as in normal times. Finally, we show that the rule estimated during the great recession is able to deliver an economic outcome closer to the flexible price one than the rule describing the Federal Reserve’s conduct in normal times.

Suggested Citation

  • Giovanni Pellegrino & Efrem Castelnuovo & Giovanni Caggiano, 2021. "Uncertainty and Monetary Policy during the Great Recession," Economics Working Papers 2021-05, Department of Economics and Business Economics, Aarhus University.
  • Handle: RePEc:aah:aarhec:2021-05
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

    Citations

    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Uncertainty and Monetary Policy during the Great Recession
      by Christian Zimmermann in NEP-DGE blog on 2021-04-19 16:48:30

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    More about this item

    Keywords

    Uncertainty shock; nonlinear IVAR; nonlinear DSGE framework; minimum-distance estimation; great recession;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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