Endogenous Uncertainty and Monetary Policy

Macroeconomic Dynamics, forthcoming

35 Pages Posted: 15 Oct 2020 Last revised: 3 Mar 2023

See all articles by ShinHyuck Kang

ShinHyuck Kang

Korea Labor Institute

Kwangyong Park

Economist, Economic Research Institute, The Bank of Korea

Date Written: August 25, 2020

Abstract

We empirically investigate how uncertainty endogenously interacts with real activity and monetary policy, and analyze the role of endogeneity in shaping the efficacy of monetary policy using a shock restricted structural vector-auto-regression model. Using the model, we show that both real and financial uncertainty endogenously react to business cycle fluctuations and to monetary policy actions. Then we provide two novel policy implications of endogenous uncertainty. First, a tighter monetary policy reduces financial uncertainty, but heightens real uncertainty. Second, endogeneity channels in uncertainty amplify the real effects of monetary policy.

Keywords: Endogenous Uncertainty, Monetary Policy

JEL Classification: C52, D80, E52

Suggested Citation

Kang, ShinHyuck and Park, Kwangyong, Endogenous Uncertainty and Monetary Policy (August 25, 2020). Macroeconomic Dynamics, forthcoming, Available at SSRN: https://ssrn.com/abstract=3680434 or http://dx.doi.org/10.2139/ssrn.3680434

ShinHyuck Kang

Korea Labor Institute ( email )

9th Flr., Korea Federation of Small Business Bldg
16-2 Youido-dong, Yongdungpo-gu
Seoul 150-010
Korea

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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