The Response of Monetary Policy to Uncertainty: Theory and Empirical Evidence for the US
This paper developes a theoretical model to analyse the impact of uncertainty about the true state of the economy on monetary policy. The theoretical model is tested on US data since the early 1980s. Our estimates suggest that the effect of uncertainty on interest rates was most marked in 1983, when uncertainty increased interest rates by up to 140 basis points, in 1990-91, when uncertainty reduced interest rates by up to 80 basis points and in 1996-2001 when uncertainty reduced interest rates by up to 70 basis points over five years.
|Date of creation:||Jul 2005|
|Date of revision:||Aug 2006|
|Note:||We thank seminar audiences at Brunel, Cambridge and Loughborough Universities and at Cass Business School for their comments.|
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