Uncertainty, Attention Allocation and Monetary Policy Asymmetry
97 Pages Posted: 31 Jan 2019
Date Written: January 28, 2019
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: Suggested Citation