Conventional and Unconventional Monetary Policy Reaction to Uncertainty in Advanced Economies: Evidence from Quantile Regressions

This paper offers new insight on how the Federal Reserve (Fed) and other monetary policy makers (Bank of England, Bank of Japan and the European Central Bank), reacted in the aftermath of the financial crisis. To this end, the paper makes use of a quantile-based approach that estimates the response of interest rates to inflation and the output gap at various points of the conditional distribution of interest rates. Furthermore to gauge the importance of monetary policy making at the zero lower bound, and to test the propositions that policy shows greater aggression in expansionary measures as interest rates reach low levels, and increasing aggression as the lower bound is approached, we make use of the shadow short rate of interest and a measure of uncertainty to capture this fact. While the results show no detectable evidence of increasing aggression to inflation as the zero lower bound is approached, yet the decreased reaction of the Fed and other monetary policy makers towards uncertainty particularly at lower quantiles of interest rates lends support to expansionary mechanism in place during this time.