Market-Based Monetary Policy Uncertainty

The Economic Journal, Forthcoming

58 Pages Posted: 30 Apr 2019 Last revised: 4 Jan 2022

See all articles by Michael Bauer

Michael Bauer

Universität Hamburg

Aeimit Lakdawala

Wake Forest University - Department of Economics

Philippe Mueller

Warwick Business School Finance Group

Multiple version iconThere are 2 versions of this paper

Date Written: September 24, 2021


Uncertainty about future policy rates plays a crucial role for the transmission of monetary policy to financial markets. We demonstrate this using event studies of FOMC announcements and a new model-free uncertainty measure based on derivatives. Over the "FOMC uncertainty cycle" announcements systematically resolve uncertainty, which then gradually ramps up again. Changes in monetary policy uncertainty around FOMC announcements--often due to forward guidance--have pronounced effects on asset prices that are distinct from the effects of conventional policy surprises. The level of uncertainty determines the magnitude of financial market reactions to surprises about the path of policy rates.

Keywords: policy uncertainty, implied volatility, Federal Reserve, FOMC announcements, event study, asset prices

JEL Classification: E44, E52, E58, G10

Suggested Citation

Bauer, Michael and Lakdawala, Aeimit and Mueller, Philippe, Market-Based Monetary Policy Uncertainty (September 24, 2021). The Economic Journal, Forthcoming, Available at SSRN: or

Michael Bauer (Contact Author)

Universität Hamburg ( email )

Von-Melle-Park 5
Hamburg, 20146


Aeimit Lakdawala

Wake Forest University - Department of Economics ( email )

Winston Salem, NC
United States


Philippe Mueller

Warwick Business School Finance Group ( email )

Gibbet Hill Rd
Coventry, CV4 7AL
Great Britain

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