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Monetary Policy Uncertainty: A Tale of Two Tails

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  • Tatjana Dahlhaus
  • Tatevik Sekhposyan

Abstract

We document a strong asymmetry in the evolution of federal funds rate expectations and map this observed asymmetry into measures of monetary policy uncertainty. We show that periods of monetary policy tightening and easing are distinctly related to downside (policy rate is higher than expected) and upside (policy rate is lower than expected) uncertainty. Downside monetary policy uncertainty decreases over time, while upside uncertainty remains rather stable, reflecting the asymmetry in the behavior of the expectational errors—a finding that we attribute to changes in the conduct of monetary policy. We show that this behavior cannot be entirely explained by uncertainty in macroeconomic fundamentals: the asymmetry remains even when we control for macroeconomic uncertainty, emphasizing the importance of monetary policy implementation. Finally, we assess the macroeconomic effects of monetary policy uncertainty. We find that the effects are non-linear and conditional on the economy being in an easing or tightening regime. Though uncertainty is, in general, recessionary, its effects are stronger in a monetary easing regime relative to a tightening one.

Suggested Citation

  • Tatjana Dahlhaus & Tatevik Sekhposyan, 2018. "Monetary Policy Uncertainty: A Tale of Two Tails," Staff Working Papers 18-50, Bank of Canada.
    • Handle: RePEc:bca:bocawp:18-50
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    References listed on IDEAS

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    More about this item

    Keywords

    Business fluctuations and cycles; Econometric and statistical methods; Monetary policy communications; Transmission of monetary policy; Uncertainty and monetary policy;
    All these keywords.

    JEL classification:

    • C18 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Methodolical Issues: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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