The Relative Importance of Monetary Policy, Uncertainty, and Financial Shocks

Cosmas Dery and Apostolos Serletis
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Cosmas Dery: University of Calgary

Open Economies Review, 2021, vol. 32, issue 2, No 4, 333 pages

Abstract: Abstract Motivated by recent research suggesting that uncertainty and financial shocks have become the most important sources of business cycle fluctuations, we assess the relative importance of monetary policy, uncertainty, and financial shocks in explaining key macroeconomic variations. Using a Bayesian monetary structural vector autoregressive model augmented with measures of uncertainty and tightness of financial conditions, we identify monetary policy, uncertainty, and financial shocks based on a penalty function approach. We find that uncertainty shocks have become a relatively more important source of output fluctuations than traditional monetary policy shocks and financial shocks. We also find that monetary policy shocks outperform uncertainty and financial shocks in explaining inflation dynamics and that financial shocks are relatively more important than monetary policy and uncertainty shocks in explaining the swings in the stock market. However, these shocks are not the major driver of exchange rates.

Keywords: Uncertainty shocks; Monetary policy shocks; Financial shocks; Output; Inflation (search for similar items in EconPapers)
JEL-codes: E32 E44 E52 E58 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (2)

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DOI: 10.1007/s11079-020-09602-6

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