Monetary Policy Uncertainty and Economic Fluctuations at the Zero Lower Bound

61 Pages Posted: 18 Nov 2021

See all articles by Enrique Martínez-García

Enrique Martínez-García

Federal Reserve Bank of Dallas - Research Department

Rachel Doehr

Point72 Asset Management.

Multiple version iconThere are 2 versions of this paper

Date Written: November 1, 2021


We propose a TVP-VAR with stochastic volatility for the unemployment rate, core inflation and the federal funds rate augmented with survey-based interest rate expectations and uncertainty and a FAVAR with a wider set of observable variables and alternative monetary policy measures in order to explore U.S. monetary policy, accounting for the zero-lower bound. We find that a rise in monetary policy uncertainty increases unemployment and lowers core inflation; the effects on unemployment in particular are robust (a gradual 0.4 percentage point increase), lasting more than two years after the initial shock. Interest rate uncertainty shocks explain a significant portion of macro fluctuations, particularly after the 2007-09 global financial crisis contributing to push the unemployment rate one percentage point higher during the early phase of the subsequent recovery. Furthermore, we find that higher interest rate uncertainty makes forward guidance shocks (but also federal funds rate shocks) less effective at moving unemployment and core inflation. We also posit a theoretical model to provide the structural backbone for our empirical results, via an “option value” channel. Theory yields sizeable real effects and a muted monetary policy transmission mechanism as firms choose to postpone investment decisions in response to heightened interest rate uncertainty.

Keywords: Monetary Policy Transmission Mechanism; Monetary Policy Uncertainty; Forward Guidance; Business Cycle Propagation; Survey-Based Forecasts.

JEL Classification: E30, E32, E43, E52

Suggested Citation

Martinez-Garcia, Enrique and Doehr, Rachel, Monetary Policy Uncertainty and Economic Fluctuations at the Zero Lower Bound (November 1, 2021). Available at SSRN: or

Enrique Martinez-Garcia (Contact Author)

Federal Reserve Bank of Dallas - Research Department ( email )

2200 North Pearl Street
PO Box 655906
Dallas, TX 75265-5906
United States
214-922-5262 (Phone)


Rachel Doehr

Point72 Asset Management. ( email )

55 Hudson Yards
New York, NY 10001

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
PlumX Metrics