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The risk management approach to monetary policy, nonlinearity and aggressiveness: the case of the US Fed

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  • Moccero, Diego
  • Gnabo, Jean-Yves

Abstract

We estimate regime switching models where the strength of the response of monetary policy to macroeconomic conditions depends on the level of risk associated with the inflation outlook and risk in financial markets. Using quarterly data for the Greenspan period we find that: i) risk in the inflation outlook and volatility in financial markets are a powerful driver of monetary policy regime changes in the U.S.; ii) the response of the US Fed to the inflation outlook is invariant across policy regimes; iii) however, in periods of high economic risk, monetary policy tends to respond more aggressively to the output gap and the degree of inertia tends to be lower than in normal circumstances; and iv) the US Fed is estimated to have responded aggressively to the output gap in the late 1980s and begging of the 1990s, and in the late 1990s and early 2000s. JEL Classification: C24, C51, E52

Suggested Citation

  • Moccero, Diego & Gnabo, Jean-Yves, 2015. "The risk management approach to monetary policy, nonlinearity and aggressiveness: the case of the US Fed," Working Paper Series 1792, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:20151792
    Note: 3597823
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    3. Bauer, Christian & Neuenkirch, Matthias, 2017. "Forecast uncertainty and the Taylor rule," Journal of International Money and Finance, Elsevier, vol. 77(C), pages 99-116.
    4. Besma Hkiri & Juncal Cunado & Mehmet Balcilar & Rangan Gupta, 2021. "Time-varying relationship between conventional and unconventional monetary policies and risk aversion: international evidence from time- and frequency-domains," Empirical Economics, Springer, vol. 61(6), pages 2963-2983, December.
    5. Eichler, Stefan & Lähner, Tom & Noth, Felix, 2016. "Regional Banking Instability and FOMC Voting," IWH Discussion Papers 15/2016, Halle Institute for Economic Research (IWH).
    6. Giovanni Caggiano & Efrem Castelnuovo & Gabriela Nodari, 2014. "Uncertainty and Monetary Policy in Good and Bad Times," "Marco Fanno" Working Papers 0188, Dipartimento di Scienze Economiche "Marco Fanno".
    7. Dibooglu, Sel & Erdogan, Seyfettin & Yildirim, Durmus Cagri & Cevik, Emrah Ismail, 2020. "Financial conditions and monetary policy in the US," Economic Systems, Elsevier, vol. 44(4).

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    More about this item

    Keywords

    aggressiveness; monetary policy; risk management; smooth-transition regression model; US Fed;
    All these keywords.

    JEL classification:

    • C24 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Truncated and Censored Models; Switching Regression Models; Threshold Regression Models
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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