Does Perception Matter? The Role of Monetary Policy Uncertainty in Policy Transmission

Aariya Sen ()
Additional contact information
Aariya Sen: Assistant Professor (Economics), Faculty-in- Charge, Placement and Internship Cell, School of Business, Indian Institute of Technology Guwahati, Guwahati, Assam, India- 781039

Working Papers from Madras School of Economics,Chennai,India

Abstract: The effectiveness of monetary policy transmission to the macroeconomy is contingent on numerous factors. Policy uncertainty is often considered a major deterrent to smooth monetary policy transmission, which inflicts the pain of frequent changes in expectations by the market players. In this study, I analyze the impact of a perceived monetary policy uncertainty (MPU) index for India, constructed based on news-paper data, on financial markets as well as on monetary policy transmission. The computed MPU index exhibits a negative correlation with the sentiment in Monetary Policy Committee minutes, where higher positive sentiment on the minutes moves along with a lower MPU. The empirical examination using wavelet transformation and spillovers showed that MPU has had significant spillovers in Indian financial markets and is widely correlated to business cycle movements. Finally, the analysis documenting the transmission to the real economy shows that a state of high uncertainty dampens monetary policy transmission and adversely affects consumer confidence, sovereign risk, investment inflows and balance of trade. The results underscore the need for effective communication from the Central Bank and the need to manage expectations in the financial markets through forward guidance, transparency, and accountability.

Keywords: Monetary Policy Uncertainty; Monetary Policy Transmission; Financial Markets; Central Bank Communication; Sentiment Analysis; Asymmetry; Wavelet Analysis (search for similar items in EconPapers)
JEL-codes: E43 E44 E52 E58 G14 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2026-04
New Economics Papers: this item is included in nep-inv and nep-mon
References: Add references at CitEc
Citations:

Downloads: (external link)
https://mse.ac.in/wp-content/uploads/2026/04/Working-paper-297.pdf (application/pdf)

Related works:
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:mad:wpaper:2026-297

Access Statistics for this paper

More papers in Working Papers from Madras School of Economics,Chennai,India Contact information at EDIRC.
Bibliographic data for series maintained by Geetha G ().