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Risk, Uncertainty and Monetary Policy

Listed author(s):
  • Geert Bekaert
  • Marie Hoerova
  • Marco Lo Duca

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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File URL: http://www.nber.org/papers/w16397.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16397.

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Date of creation: Sep 2010
Publication status: published as Bekaert, Geert & Hoerova, Marie & Lo Duca, Marco, 2013. "Risk, uncertainty and monetary policy," Journal of Monetary Economics, Elsevier, vol. 60(7), pages 771-788.
Handle: RePEc:nbr:nberwo:16397
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