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Uncertainty and Monetary Policy in Good and Bad Times

Giovanni Caggiano, Efrem Castelnuovo and Gabriela Nodari

RBA Research Discussion Papers from Reserve Bank of Australia

Abstract: We investigate the role played by systematic monetary policy in the United States in tackling the real effects of uncertainty shocks in recessions and expansions. We model key indicators of the business cycle with a nonlinear vector autoregression model that allows for different dynamics in busts and booms. Uncertainty shocks are identified by focusing on historical events that are associated with jumps in financial volatility. Our results show that uncertainty shocks hitting in recessions trigger a more abrupt drop and a faster recovery in real economic activity than in expansions. Counterfactual simulations suggest that the effectiveness of systematic US monetary policy in stabilising real activity in the aftermath of an uncertainty shock is greater in expansions. Finally, we provide empirical and narrative evidence pointing to a risk management approach by the Federal Reserve.

Keywords: uncertainty shocks; nonlinear smooth transition vector autoregressions; generalised impulse response functions; systematic monetary policy (search for similar items in EconPapers)
JEL-codes: C32 E32 (search for similar items in EconPapers)
Date: 2017-10
New Economics Papers: this item is included in nep-cba, nep-cta, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (51)

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Related works:
Working Paper: Uncertainty and Monetary Policy in Good and Bad Times (2017) Downloads
Working Paper: Uncertainty and Monetary Policy in Good and Bad Times (2017) Downloads
Working Paper: Uncertainty and monetary policy in good and bad times (2017) Downloads
Working Paper: Uncertainty and Monetary Policy in Good and Bad Times (2014) Downloads
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