Uncertainty and Monetary Policy Rules in the United States

Christopher Martin and Costas Milas

Economics and Finance Discussion Papers from Economics and Finance Section, School of Social Sciences, Brunel University

Abstract: This paper analyses the impact of uncertainty about the true state of the economy on monetary policy rules in the US since the early 1980s. Extending the Taylor rule to allow for this type of uncertainty, we find evidence that the predictions of the theoretical literature on responses to uncertainty are reflected in the behaviour of policymakers, suggesting that policymakers are adhering to prescriptions for optimal policy. We find that the impact of uncertainty was most marked in 1983, when uncertainty increased interest rates by up to 140 basis points, in 1989-90, when uncertainty increased interest rates by up to 50 basis points and in 1996-2001 when uncertainty reduced interest rates by up to 50 basis points over five years.

Pages: 27 pages
Date: 2005-11
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Related works:
Journal Article: UNCERTAINTY AND MONETARY POLICY RULES IN THE UNITED STATES (2009)
Working Paper: Uncertainty and Monetary Policy Rules in the United States (2005)
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