Monetary Policy Uncertainty and Economic Fluctuations
61 Pages Posted: 4 Oct 2014 Last revised: 28 Nov 2016
Date Written: June 24, 2016
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
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