Less Bang for the Buck? Assessing the Role of Inflation Uncertainty for U.S. Monetary Policy Transmission in a Data Rich Environment
CEGE - Discussion Papers, Number 358 - December 2018
49 Pages Posted: 20 Dec 2018
Date Written: November 30, 2018
We investigate the relationship between inflation uncertainty and monetary policy transmission in the U.S. economy. Monetary policy shocks are identified within the framework of nonlinear structural factor-augmented VARs which allow us to analyze several complementary hypotheses connecting IU with reduced monetary policy effectiveness. We find that the real effects of monetary policy shocks are markedly dampened conditional on high IU. This can be traced back to, inter alia, real-option and precautionary savings effects which distort the traditional interest rate channel. Moreover, policy transmission through the external finance premium and the term structure of interest rates appears strongly dependent on inflation uncertainty and contributes to the reduced policy effectiveness.
Keywords: inflation uncertainty, SVAR, monetary policy, sign restrictions, asset prices, smoothtransition
JEL Classification: C32, E44, E52
Suggested Citation: Suggested Citation