Monetary Policy Uncertainty and Economic Fluctuations

61 Pages Posted: 4 Oct 2014 Last revised: 28 Nov 2016

See all articles by Drew Creal

Drew Creal

University of Chicago - Booth School of Business - Econometrics and Statistics

Jing Cynthia Wu

University of Notre Dame - Department of Economics; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: June 24, 2016

Abstract

We investigate the relationship between uncertainty about monetary policy and its transmission mechanism, and economic fluctuations. We propose a new term structure model where the second moments of macroeconomic variables and yields can have a first-order effect on their dynamics. The data favors a model with two unspanned volatility factors that capture uncertainty about monetary policy and the term premium. Uncertainty contributes negatively to economic activity. Two dimensions of uncertainty react in opposite directions to a shock to the real economy, and the response of inflation to uncertainty shocks vary across different historical episodes.

Keywords: Uncertainty, monetary policy, term premium, macroeconomic fluctuations, affine term structure models, stochastic volatility, Bayesian estimation

Suggested Citation

Creal, Drew and Wu, Jing Cynthia, Monetary Policy Uncertainty and Economic Fluctuations (June 24, 2016). Chicago Booth Research Paper No. 14-32. Available at SSRN: https://ssrn.com/abstract=2504590 or http://dx.doi.org/10.2139/ssrn.2504590

Drew Creal

University of Chicago - Booth School of Business - Econometrics and Statistics ( email )

Chicago, IL 60637
United States

Jing Cynthia Wu (Contact Author)

University of Notre Dame - Department of Economics ( email )

Notre Dame, IN 46556
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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