Economic Uncertainty and the Effectiveness of Monetary Policy

34 Pages Posted: 12 Nov 2013

See all articles by Knut Aastveit

Knut Aastveit

Norges Bank

Gisle James James Natvik

BI Norwegian Business School - Department of Economics

Sergio Sola

Graduate Institute of International and Development Studies (IHEID) - Department of Economics

Date Written: June 1, 2013

Abstract

This paper explores if economic uncertainty alters the macroeconomic influence of monetary policy. We consider several measures of U.S. economic uncertainty, and estimate their interaction effects with monetary policy shocks as identified through structural vector autoregressions. We find that monetary policy shocks affect economic activity considerably weaker when uncertainty is high, consistently with "real-options" effects suggested by models with non-convex adjustment costs. Investment responds two to five times weaker when uncertainty is in its upper instead of its lower decile. High U.S. uncertainty is associated with lower policy influence not only domestically, but in Canada too.

Keywords: Uncertainty, Monetary Policy, Structural VAR

JEL Classification: E30, E32, E37

Suggested Citation

Aastveit, Knut and Natvik, Gisle James James and Sola, Sergio, Economic Uncertainty and the Effectiveness of Monetary Policy (June 1, 2013). Norges Bank Working Paper 17. Available at SSRN: https://ssrn.com/abstract=2353008 or http://dx.doi.org/10.2139/ssrn.2353008

Knut Aastveit (Contact Author)

Norges Bank ( email )

P.O. Box 1179
Oslo, N-0107
Norway

Gisle James James Natvik

BI Norwegian Business School - Department of Economics ( email )

Nydalsveien 37
Oslo, 0484
Norway

Sergio Sola

Graduate Institute of International and Development Studies (IHEID) - Department of Economics ( email )

Geneva Avenue de la Paix 11A
Geneva, 1202
Switzerland

Register to save articles to
your library

Register

Paper statistics

Downloads
504
rank
53,215
Abstract Views
1,678
PlumX Metrics