Uncertainty and Monetary Policy in Good and Bad Times

66 Pages Posted: 23 Mar 2017

See all articles by Giovanni Caggiano

Giovanni Caggiano

Department of Economics, Monash University; University of Padua

Efrem Castelnuovo

Melbourne Institute and Department of Economics; University of Padua - Department of Economics

Gabriela Nodari

University of Verona - Department of Economics; Reserve Bank of New Zealand

Multiple version iconThere are 3 versions of this paper

Date Written: March 22, 2017

Abstract

We investigate the role played by systematic monetary policy in tackling the real effects of uncertainty shocks in U.S. recessions and expansions. We model key indicators of the business cycle with a nonlinear VAR that allows for different dynamics in busts and booms. Uncertainty shocks are identified by focusing on historical events that are associated to jumps in financial volatility. Uncertainty shocks hitting in recessions are found to trigger a more abrupt drop and a faster recovery in real activity than in expansions. Counterfactual simulations suggest that the effectiveness of systematic monetary policy in stabilizing real activity is greater in expansions. Finally, we provide empirical and narrative evidence pointing to a risk management approach by the Federal Reserve.

Keywords: Uncertainty shocks, nonlinear Smooth Transition Vector AutoRegressions, Generalized Impulse Response Functions, systematic monetary policy

JEL Classification: C32, E32

Suggested Citation

Caggiano, Giovanni and Castelnuovo, Efrem and Nodari, Gabriela, Uncertainty and Monetary Policy in Good and Bad Times (March 22, 2017). Melbourne Institute Working Paper No. 9/17. Available at SSRN: https://ssrn.com/abstract=2939377 or http://dx.doi.org/10.2139/ssrn.2939377

Giovanni Caggiano

Department of Economics, Monash University ( email )

900 Dandenong Road
Caulfield East, Victoria 3145
Australia

HOME PAGE: http://https://sites.google.com/site/giovannicaggiano72/CV/home

University of Padua ( email )

Via 8 Febbraio, 2
Padova, Vicenza 35122
Italy

Efrem Castelnuovo (Contact Author)

Melbourne Institute and Department of Economics ( email )

Melbourne, 3010
Australia

HOME PAGE: http://https://sites.google.com/site/efremcastelnuovo/home

University of Padua - Department of Economics ( email )

via Del Santo 33
Padova, 35123
Italy

Gabriela Nodari

University of Verona - Department of Economics ( email )

Via dell'Artigliere, 8
37129 Verona
Italy

HOME PAGE: http://sites.google.com/site/gabrielanodari/

Reserve Bank of New Zealand ( email )

2 The Terrace
PO Box 2498
Wellington, 6140
New Zealand

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