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Risk, uncertainty and monetary policy

Listed author(s):
  • Geert Bekaert

    (Graduate School of Business, Columbia University)

  • Marie Hoerova

    (ECB)

  • Marco Lo Duca

    (ECB)

The VIX, the stock market option-based implied volatility, strongly co-moves with measures of the monetary policy stance. When decomposing the VIX into two components, a proxy for risk aversion and expected stock market volatility (“uncertainty”), we find that a lax monetary policy decreases both risk aversion and uncertainty, with the former effect being stronger. The result holds in a structural vector autoregressive framework, controlling for business cycle movements and using a variety of identification schemes for the vector autoregression in general and monetary policy shocks in particular.

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Paper provided by National Bank of Belgium in its series Working Paper Research with number 229.

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Length: 63 pages
Date of creation: Oct 2012
Handle: RePEc:nbb:reswpp:201210-229
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