Monetary policy uncertainty and inflation expectations

Gabriel Arce-Alfaro and Boris Blagov

No 899, Ruhr Economic Papers from RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen

Abstract: Do inflation expectations react to changes in the volatility of monetary policy? Yes, but only until the global financial crisis. This paper investigates whether increasing the dispersion of monetary policy shocks, which is interpreted as elevated uncertainty surrounding monetary policy, affects the inflation expectation formation process. Based on U.S. data since the 1980s and a stochastic volatility-in-mean structural VAR model we find that monetary policy uncertainty reduces both inflation expectations and inflation. However, after the Great Recession this link has disappeared, even when controlling for the Zero Lower Bound.

Keywords: Monetary policy uncertainty; inflation expectations; SVAR volatility-in-mean; time-varying coefficients (search for similar items in EconPapers)
JEL-codes: C11 C32 E52 (search for similar items in EconPapers)
Date: 2021
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon and nep-ore
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:rwirep:899

DOI: 10.4419/96973039

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