Uncertainty, Financial Markets, and Monetary Policy over the Last Century

52 Pages Posted: 14 May 2019 Last revised: 21 Dec 2020

See all articles by Sangyup Choi

Sangyup Choi

Yonsei University

Chansik Yoon

Princeton University

Date Written: 10 1, 2020


What has been the effect of uncertainty shocks in the U.S. economy over the last century? What are the roles of the financial channel and monetary policy channel in propagating uncertainty shocks? Our empirical strategies enable us to distinguish between the effects of uncertainty shocks on key macroeconomic and financial variables transmitted through each channel. A hundred years of data further allow us to answer these questions from a novel historical perspective. This paper finds robust evidence that financial conditions captured by both borrowing costs and the availability of credit have played a crucial role in propagating uncertainty shocks over the last century. However, heightened uncertainty does not necessarily amplify the adverse effect of financial shocks, suggesting an asymmetric interaction between uncertainty and financial shocks. Interestingly, the monetary policy stance seems to play only a minor role in propagating uncertainty shocks, which is in sharp contrast to the recent claim that binding zero-lower-bound amplifies the negative effect of uncertainty shocks. We argue that the contribution of constrained monetary policy to amplifying uncertainty shocks is largely masked by the joint concurrence of binding zero-lower-bound and tightened financial conditions.

Keywords: uncertainty shocks, financial channel, counterfactual VARs, local projections, zero-lower-bound

JEL Classification: E31, E32, E44, G10

Suggested Citation

Choi, Sangyup and Yoon, Chansik, Uncertainty, Financial Markets, and Monetary Policy over the Last Century (10 1, 2020). Available at SSRN: https://ssrn.com/abstract=3386824 or http://dx.doi.org/10.2139/ssrn.3386824

Sangyup Choi (Contact Author)

Yonsei University ( email )

Korea, Republic of (South Korea)

Chansik Yoon

Princeton University ( email )

Princeton, NJ
United States

HOME PAGE: http://sites.google.com/view/chansikyoon

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