Uncertainty and Monetary Policy in the US: A Journey into Non-Linear Territory

Giovanni Pellegrino

Economics Working Papers from Department of Economics and Business Economics, Aarhus University

Abstract: This paper estimates a non-linear Interacted VAR model to assess whether the real effects of stimulative monetary policy shocks are milder during times of high uncertainty. Crucially, uncertainty is modeled endogenously in the VAR, thus allowing to take account of two unexplored channels of monetary policy transmission working through uncertainty mitigation and uncertainty mean reversion. Generalized Impulse Response Functions à la Koop, Pesaran and Potter (1996) reveal that monetary policy shocks are significantly less powerful during uncertain times, the peak reactions of a battery of real variables being about two-thirds milder than those during tranquil times. Failing to account for endogenous uncertainty would bias responses and imply twice as powerful monetary policy during uncertain times as during tranquil times, mainly because of the non-consideration of uncertainty mean reversion.

Keywords: Monetary policy shocks; Non-Linear Structural Vector Auto-Regressions; Interacted VAR; Generalized Impulse Response Functions; Endogenous Uncertainty (search for similar items in EconPapers)
JEL-codes: C32 E32 E52 (search for similar items in EconPapers)
Pages: 69
Date: 2020-06-03
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://repec.econ.au.dk/repec/afn/wp/20/wp20_05.pdf (application/pdf)

Related works:
Journal Article: Uncertainty and monetary policy in the US: A journey into nonlinear territory (2021)
Working Paper: Uncertainty and Monetary Policy in the US: A Journey into Non-Linear Territory (2017)
Working Paper: Uncertainty And Monetary Policy In The US: A Journey Into Non-Linear Territory (2015)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:aah:aarhec:2020-05

Access Statistics for this paper

More papers in Economics Working Papers from Department of Economics and Business Economics, Aarhus University
Bibliographic data for series maintained by ().