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

See all articles by Helmut Herwartz

Helmut Herwartz

University of Goettingen (Gottingen)

Hannes Rohloff

University of Goettingen (Gottingen)

Date Written: November 30, 2018

Abstract

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

Herwartz, Helmut and Rohloff, Hannes, Less Bang for the Buck? Assessing the Role of Inflation Uncertainty for U.S. Monetary Policy Transmission in a Data Rich Environment (November 30, 2018). CEGE - Discussion Papers, Number 358 - December 2018. Available at SSRN: https://ssrn.com/abstract=3289962 or http://dx.doi.org/10.2139/ssrn.3289962

Helmut Herwartz (Contact Author)

University of Goettingen (Gottingen) ( email )

Platz der Gottinger Sieben 3
Gottingen, D-37073
Germany

Hannes Rohloff

University of Goettingen (Gottingen) ( email )

Platz der Gottinger Sieben 3
Gottingen, D-37073
Germany

Register to save articles to
your library

Register

Paper statistics

Downloads
11
Abstract Views
120
PlumX Metrics