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Monetary Policy Uncertainty and Economic Fluctuations

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  • Drew D. Creal
  • Jing Cynthia Wu

Abstract

We investigate the relationship between uncertainty about monetary policy and its transmission mechanism, and economic fluctuations. We propose a new term structure model where the second moments of macroeconomic variables and yields can have a first-order effect on their dynamics. The data favors a model with two unspanned volatility factors that capture uncertainty about monetary policy and the term premium. Uncertainty contributes negatively to economic activity. Two dimensions of uncertainty react in opposite directions to a shock to the real economy, and the response of inflation to uncertainty shocks vary across different historical episodes.

Suggested Citation

  • Drew D. Creal & Jing Cynthia Wu, 2014. "Monetary Policy Uncertainty and Economic Fluctuations," NBER Working Papers 20594, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:20594
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    More about this item

    JEL classification:

    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates

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