Risk Management-Driven Policy Rate Gap
17 Pages Posted: 8 Aug 2018 Last revised: 5 Dec 2018
Date Written: August 7, 2018
We employ real-time data available to the US monetary policy makers to estimate a Taylor rule augmented with a measure of financial uncertainty over the period 1969-2008. We find evidence in favor of a systematic response to financial uncertainty over and above that to expected inflation, output gap, and output growth. However, this evidence regards the Greenspan-Bernanke period only. Focusing on this period, the "risk-management" approach is found to be responsible for monetary policy easings for up to 75 basis points of the federal funds rate.
Keywords: Risk management-driven policy rate gap, uncertainty, monetary policy, Taylor rules, real-time data
JEL Classification: C2, E4, E5
Suggested Citation: Suggested Citation