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The Term Structure of Monetary Policy Uncertainty

Author

Listed:
  • Brent Bundick
  • Trenton Herriford
  • Andrew Lee Smith

Abstract

This paper studies the transmission of Federal Reserve communication to financial markets and the economy using new measures of the term structure of policy rate uncertainty. Movements in the term structure of interest rate uncertainty around FOMC announcements cannot be summarized by a single measure but instead are two dimensional. We characterize these two dimensions as the level and slope factors of the term structure of interest rate uncertainty. These two monetary policy uncertainty factors significantly help to explain changes in Treasury yields and forward real interest rates around FOMC announcements, even after accounting for changes in the expected path of policy rates. Moreover, we demonstrate that focusing on just a single dimension of monetary policy uncertainty provides an inaccurate description of how policy uncertainty shapes the transmission of FOMC announcements. Finally, our policy uncertainty factors provide stronger first-stage instruments in a proxy SVAR setting which implies more expansionary macroeconomic effects of forward guidance than those estimated only using the expected path of policy rates.

Suggested Citation

  • Brent Bundick & Trenton Herriford & Andrew Lee Smith, 2022. "The Term Structure of Monetary Policy Uncertainty," Research Working Paper RWP 2022-02, Federal Reserve Bank of Kansas City.
  • Handle: RePEc:fip:fedkrw:93837
    DOI: 10.18651/RWP2022-02
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    References listed on IDEAS

    as
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    11. Brent Bundick & Trenton Herriford, 2017. "How Do FOMC Projections Affect Policy Uncertainty?," Economic Review, Federal Reserve Bank of Kansas City, issue Q II, pages 5-22.
    12. Anna, Petrenko, 2016. "Мaркування готової продукції як складова частина інформаційного забезпечення маркетингової діяльності підприємств овочепродуктового підкомплексу," Agricultural and Resource Economics: International Scientific E-Journal, Agricultural and Resource Economics: International Scientific E-Journal, vol. 2(1), March.
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    More about this item

    Keywords

    Monetary Policy Uncertainty; Forward Guidance; Proxy VAR;
    All these keywords.

    JEL classification:

    • 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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