Uncertainty And Monetary Policy In The US: A Journey Into Non-Linear Territory

This paper estimates a non-linear Interacted VAR model in order to assess whether the real effects of monetary policy shocks are lower during times of high uncertainty. In a novel way with respect to the literature, uncertainty, which serves as the conditioning indicator discriminating "high" from "low" uncertainty states, is modeled endogenously in the VAR and is found to reduce after the shocks. Generalized Impulse Response Functions à la Koop, Pesaran and Potter (1996) suggest that monetary policy shocks are signi?cantly less effective during uncertain times, with the peak reactions of a battery of real variables being about two-thirds milder than those during tranquil times. We also show that, consistently with Vavra?s (2014) predictions, the reaction of prices appears greater during ?firm-level uncertain times.