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Economic uncertainty and the effectiveness of monetary policy

Author

Listed:
  • Knut Are Aastveit

    () (Norges Bank (Central Bank of Norway))

  • Gisle James Natvik

    () (Norges Bank (Central Bank of Norway))

  • Sergio Sola

    () (Graduate Institute, Geneva)

Abstract

This paper explores if economic uncertainty alters the macroeconomic influence of monetary policy. We consider several measures of U.S. economic uncertainty, and estimate their interaction effects with monetary policy shocks as identified through structural vector autoregressions. We find that monetary policy shocks affect economic activity considerably weaker when uncertainty is high, consistently with "real-options" effects suggested by models with non-convex adjustment costs. Investment responds two to five times weaker when uncertainty is in its upper instead of its lower decile. High U.S. uncertainty is associated with lower policy influence not only domestically, but in Canada too.

Suggested Citation

  • Knut Are Aastveit & Gisle James Natvik & Sergio Sola, 2013. "Economic uncertainty and the effectiveness of monetary policy," Working Paper 2013/17, Norges Bank.
  • Handle: RePEc:bno:worpap:2013_17
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    File URL: http://www.norges-bank.no/en/Published/Papers/Working-Papers/2013/WP-201317/
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    References listed on IDEAS

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    More about this item

    Keywords

    Uncertainty; Monetary policy; Structural VAR;

    JEL classification:

    • 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
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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