The Response of Monetary Policy to Uncertainty: Theory and Empirical Evidence for the US

Christopher Martin () and Costas Milas

No KERP 2006/15, Keele Economics Research Papers from Centre for Economic Research, Keele University

Abstract: This paper developes a theoretical model to analyse the impact of uncertainty about the true state of the economy on monetary policy. The theoretical model is tested on US data since the early 1980s. Our estimates suggest that the effect of uncertainty on interest rates was most marked in 1983, when uncertainty increased interest rates by up to 140 basis points, in 1990-91, when uncertainty reduced interest rates by up to 80 basis points and in 1996-2001 when uncertainty reduced interest rates by up to 70 basis points over five years.

Keywords: Monetary Policy; Uncertainty (search for similar items in EconPapers)
JEL-codes: C51 C52 E52 E58 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Date: 2005-07, Revised 2006-08
Note: We thank seminar audiences at Brunel, Cambridge and Loughborough Universities and at Cass Business School for their comments.
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Persistent link: http://EconPapers.repec.org/RePEc:kee:kerpuk:2006/15

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