The non-linear impact of monetary policy on shifts in economic policy uncertainty: evidence from the United States of America

Bogdan Dima and Ștefana Maria Dima ()
Additional contact information
Bogdan Dima: West University of Timişoara
Ștefana Maria Dima: West University of Timişoara

Empirica, 2024, vol. 51, issue 3, No 7, 755-781

Abstract: Abstract A stochastic volatility estimation of VIX index’s latent volatility is used for the United States of America, as a proxy for the adjustments in the levels of investors’ uncertainty related to current and future economic policies. The impact of monetary policy stance on such measure is examined in the framework of the distributed lag non-linear models (DLNM). We place this analysis in the literature stream emphasizing the various sources of heterogeneity concerning investors’ expectations. The main finding is that the monetary policy does impact non-linearly the adjustments in investors’ predictions. While a tighter monetary policy does generally contribute to an increase in VIX’s latent volatility, the shape of such effect varies across different GLM and GAM specifications of DLNM. This outcome remains robust, even if: (1) we control for the global price of Brent crude and consumers’ confidence; (2) we use, instead of the stochastic framework, a Markov-switching GARCH-based estimator; or (3) we replace the monetary policy instrument with monetary policy uncertainty. We argue that accounting for its nonlinear effects on financial markets is of critical importance for the design of a monetary policy pursuing global financial stability.

Keywords: Economic policy uncertainty; VIX index; Stochastic volatility; Distributed lag non-linear models; Fed’s monetary policy (search for similar items in EconPapers)
JEL-codes: E32 E44 E52 G11 G12 G20 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1007/s10663-024-09618-y Abstract (text/html)
Access to the full text of the articles in this series is restricted.

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:kap:empiri:v:51:y:2024:i:3:d:10.1007_s10663-024-09618-y

Ordering information: This journal article can be ordered from
http://www.springer. ... ration/journal/10663

DOI: 10.1007/s10663-024-09618-y

Access Statistics for this article

Empirica is currently edited by Fritz Breuss and Fritz Breuss

More articles in Empirica from Springer, Austrian Institute for Economic Research, Austrian Economic Association Contact information at EDIRC.
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().