Monetary Policy Uncertainty: A Tale of Two Tails

Tatjana Dahlhaus and Tatevik Sekhposyan

Staff Working Papers from Bank of Canada

Abstract: We document a strong asymmetry in the evolution of federal funds rate expectations and map this observed asymmetry into measures of monetary policy uncertainty. We show that periods of monetary policy tightening and easing are distinctly related to downside (policy rate is higher than expected) and upside (policy rate is lower than expected) uncertainty. Downside monetary policy uncertainty decreases over time, while upside uncertainty remains rather stable, reflecting the asymmetry in the behavior of the expectational errors—a finding that we attribute to changes in the conduct of monetary policy. We show that this behavior cannot be entirely explained by uncertainty in macroeconomic fundamentals: the asymmetry remains even when we control for macroeconomic uncertainty, emphasizing the importance of monetary policy implementation. Finally, we assess the macroeconomic effects of monetary policy uncertainty. We find that the effects are non-linear and conditional on the economy being in an easing or tightening regime. Though uncertainty is, in general, recessionary, its effects are stronger in a monetary easing regime relative to a tightening one.

Keywords: Business fluctuations and cycles; Econometric and statistical methods; Monetary policy communications; Transmission of monetary policy; Uncertainty and monetary policy (search for similar items in EconPapers)
JEL-codes: C18 C32 E02 E43 E52 (search for similar items in EconPapers)
Pages: 54 pages
Date: 2018
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:18-50

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