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Uncertainty and monetary policy in good and bad times

Author

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  • Caggiano, Giovanni
  • Castelnuovo, Efrem
  • Nodari, Gabriela

Abstract

We investigate the role played by systematic monetary policy in tackling the real effects of uncertainty shocks in U.S. recessions and expansions. We model key indicators of the business cycle with a nonlinear VAR that allows for different dynamics in busts and booms. Uncertainty shocks are identi ed by focusing on historical events that are associated to jumps in nancial volatility. Uncertainty shocks hitting in recessions are found to trigger a more abrupt drop and a faster recovery in real activity than in expansions. Counterfactual simulations suggest that the effectiveness of systematic monetary policy in stabilizing real activity is greater in expansions. Finally, we provide empirical and narrative evidence pointing to a risk management approach by the Federal Reserve.

Suggested Citation

  • Caggiano, Giovanni & Castelnuovo, Efrem & Nodari, Gabriela, 2017. "Uncertainty and monetary policy in good and bad times," Bank of Finland Research Discussion Papers 8/2017, Bank of Finland.
    • Handle: RePEc:zbw:bofrdp:rdp2017_008
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    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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