Financial uncertainty, risk aversion and monetary policy

John Inekwe

Empirical Economics, 2016, vol. 51, issue 3, No 4, 939-961

Abstract: Abstract We estimate the response of uncertainty/risk aversion to monetary policy actions in both the financial sector and the aggregate economy using a structural vector autoregressive model. When compared with other sectors, our constructs reveal that financial risk aversion/uncertainty has greater correlation with the aggregate risk aversion and uncertainty. Our analysis reveals that financial risk aversion and uncertainty exhibit stronger interdependence with monetary policy actions than aggregate uncertainty and risk aversion. Tighter monetary policy induces risk aversion and uncertainty increment in both the financial sector and the aggregate market. However, the financial sector risk aversion and uncertainty responses are of greater magnitude.

Keywords: Forecast; Variance; Risk; Uncertainty; Monetary policy (search for similar items in EconPapers)
JEL-codes: E43 E44 E52 G1 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (5)

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DOI: 10.1007/s00181-015-1036-6

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