Monetary Policy Uncertainty and Monetary Policy Surprises

34 Pages Posted: 18 May 2020

See all articles by Michiel De Pooter

Michiel De Pooter

Board of Governors of the Federal Reserve System

Giovanni Favara

Board of Governors of the Federal Reserve System

Michele Modugno

Board of Governors of the Federal Reserve System

Jason Wu

Hong Kong Monetary Authority

Date Written: April 17, 2020

Abstract

Monetary policy uncertainty affects the transmission of monetary policy shocks to longer-term nominal and real yields. For a given monetary policy shock, the reaction of yields is more pronounced when the level of monetary policy uncertainty is low. Primary dealers and other investors adjust their interest rate positions more when monetary policy uncertainty is low than when uncertainty is high. These portfolio adjustments likely explain the larger pass-through of a monetary policy shock to bond yields when uncertainty is low. These findings shed new light on the role that monetary policy uncertainty plays in the transmission of monetary policy to financial markets.

Keywords: Monetary policy surprises; Monetary policy uncertainty; Interest rates; Primary dealers

JEL Classification: E40; E50; G10

Suggested Citation

De Pooter, Michiel and Favara, Giovanni and Modugno, Michele and Wu, Jason, Monetary Policy Uncertainty and Monetary Policy Surprises (April 17, 2020). FEDS Working Paper No. 2020-032 https://doi.org/10.17016/FEDS.2020.032, Available at SSRN: https://ssrn.com/abstract=3601303

Michiel De Pooter (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Giovanni Favara

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

HOME PAGE: http://www.giovannifavara.com

Michele Modugno

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Jason Wu

Hong Kong Monetary Authority ( email )

3 Garden Road, 30th Floor
Hong Kong
Hong Kong

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