The Dynamic Impacts of Monetary Policy Uncertainty Shocks

Ahmed Kamara and Niraj P. Koirala ()
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Ahmed Kamara: Department of Decision Sciences and Economics, Texas A&M University—Corpus Christi, 6300 Ocean Drive, Corpus Christi, TX 78412, USA
Niraj P. Koirala: Department of Economics and Statistics, California State University Los Angeles, 5154 State University Dr, Los Angeles, CA 90032, USA

Economies, 2023, vol. 11, issue 1, 1-19

Abstract: This paper assesses whether the impact of monetary policy uncertainty on the U.S. economy has changed over time. Estimating a Time-Varying Parameter Vector Autoregressive model on U.S. data from 1985Q1 to 2022Q3, we find that uncertainty shocks have larger negative effects on output during the COVID-19 recession than during other periods. However, financial market variables, such as stock prices and dividends, responded more significantly to uncertainty shocks during the Asian crisis of the late 1990s, the IT bubble of the 2000s, and the Great Recession. We then develop a Dynamic Stochastic General Equilibrium model with monetary policy uncertainty. Based on the calibrated model, we conduct several counterfactual exercises to demonstrate that the effects of uncertainty shocks depend on the state of the economy, which is consistent with the empirical evidence. These findings provide new insights into the time-varying nature of the impact of economic uncertainty.

Keywords: DSGE; TVP-VAR; uncertainty shocks; COVID-19 (search for similar items in EconPapers)
JEL-codes: E F I J O Q (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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