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Risk Management-Driven Policy Rate Gap

Author

Listed:
  • Giovanni Caggiano

    (Monash University and University of Padova)

  • Efrem Castelnuovo

    (Melbourne Institute: Applied Economic & Social Research, The University of Melbourne)

  • Gabriela Nodari

    (Reserve Bank of Australia)

Abstract

We employ real-time data available to the US monetary policy makers to estimate a Taylor rule augmented with a measure of financial uncertainty over the period 1969-2008. We find evidence in favor of a systematic response to financial uncertainty over and above that to expected inflation, output gap, and output growth. However, this evidence regards the Greenspan-Bernanke period only. Focusing on this period, the "risk-management" approach is found to be responsible for monetary policy easings for up to 75 basis points of the federal funds rate.

Suggested Citation

  • Giovanni Caggiano & Efrem Castelnuovo & Gabriela Nodari, 2018. "Risk Management-Driven Policy Rate Gap," Melbourne Institute Working Paper Series wp2018n10, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
  • Handle: RePEc:iae:iaewps:wp2018n10
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    References listed on IDEAS

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    Cited by:

    1. Caggiano, Giovanni & Castelnuovo, Efrem & Delrio, Silvia & Kima, Richard, 2021. "Financial uncertainty and real activity: The good, the bad, and the ugly," European Economic Review, Elsevier, vol. 136(C).
    2. Caggiano, Giovanni & Castelnuovo, Efrem & Kima, Richard, 2020. "The global effects of Covid-19-induced uncertainty," Economics Letters, Elsevier, vol. 194(C).
    3. Martin Seneca, 2020. "Risk Shocks and Monetary Policy in the New Normal," International Journal of Central Banking, International Journal of Central Banking, vol. 16(6), pages 185-232, December.
    4. Efrem Castelnuovo & Guay Lim, 2019. "What Do We Know About the Macroeconomic Effects of Fiscal Policy? A Brief Survey of the Literature on Fiscal Multipliers," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 52(1), pages 78-93, March.
    5. Rangan Gupta & Mark Wohar, 2019. "The role of monetary policy uncertainty in predicting equity market volatility of the United Kingdom: evidence from over 150 years of data," Economics and Business Letters, Oviedo University Press, vol. 8(3), pages 138-146.

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    More about this item

    Keywords

    Risk management-driven policy rate gap; uncertainty; monetary policy; Taylor rules; real-time data;
    All these keywords.

    JEL classification:

    • C2 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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