Risk, Uncertainty and Monetary Policy
National Bank of Belgium Working Paper No. 229
63 Pages Posted: 13 Oct 2012
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Risk, Uncertainty and Monetary Policy
Risk, Uncertainty and Monetary Policy
Risk, Uncertainty and Monetary Policy
Risk, Uncertainty and Monetary Policy
Risk, Uncertainty and Monetary Policy
Risk, Uncertainty and Monetary Policy
Date Written: October 2012
Abstract
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.
Keywords: Monetary policy, Option implied volatility, Risk aversion, Uncertainty, Business cycle, Stock market volatility dynamics
JEL Classification: E44, E52, G12, G20, E32
Suggested Citation: Suggested Citation