Uncertainty, Attention Allocation and Monetary Policy Asymmetry

97 Pages Posted: 31 Jan 2019

See all articles by Kwangyong Park

Kwangyong Park

Economist, Economic Research Institute, The Bank of Korea

Date Written: January 28, 2019

Abstract

We provide a theoretical framework, with empirical evidence, where monetary policy effects become stronger during periods of heightened uncertainty in productivity. Higher aggregate and idiosyncratic productivity volatility induce firms, which are constrained by information capacity, to allocate more attention to productivities and less to the monetary policy shock. This makes firms under-react to monetary policy actions, which increases real effects of monetary policy shocks. A threshold vector autoregression, which incorporates instrumental variables to identify the monetary policy shock, finds that monetary policy shocks have stronger impacts on output when uncertainty, as measured by VIX, is high.

Keywords: Monetary policy asymmetry, Uncertainty, Information choice

JEL Classification: E31, E52, D8

Suggested Citation

Park, Kwangyong, Uncertainty, Attention Allocation and Monetary Policy Asymmetry (January 28, 2019). Bank of Korea WP 2019-5. Available at SSRN: https://ssrn.com/abstract=3324769 or http://dx.doi.org/10.2139/ssrn.3324769

Kwangyong Park (Contact Author)

Economist, Economic Research Institute, The Bank of Korea ( email )

110, 3-Ga, Namdaemunno, Jung-Gu
Seoul 100-794
Korea, Republic of (South Korea)

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