Does U.S. Monetary Policy Respond to Macroeconomic Uncertainty?

Thomas Gomez and Giulia Piccillo

No 10407, CESifo Working Paper Series from CESifo

Abstract: We find that macroeconomic uncertainty plays a significant role in U.S. monetary policy. First, we construct a measure of uncertainty as felt by policymakers at the time of making their rate-setting decisions. This measure is derived from a real-time, Bayesian estimation of a small monetary VAR with time-varying parameters. We use it to calculate the probability of being in a high-uncertainty regime. Second, we estimate a monetary policy reaction function that, apart from macroeconomic uncertainty, includes Greenbook forecasts, revisions of those forecasts, and a measure of stock market volatility. Using data for the period 1969 - 2008, we find that policymakers set an interest rate that is significantly lower in a high-uncertainty regime, compared to a low-uncertainty regime.

Keywords: monetary policy; uncertainty; real-time data; Bayesian VAR; time-varying coefficients (search for similar items in EconPapers)
JEL-codes: D81 E01 E52 E58 (search for similar items in EconPapers)
Date: 2023
New Economics Papers: this item is included in nep-cba and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_10407

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