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Uncertainty and Monetary Policy during the Great Recession

Giovanni Pellegrino, Efrem Castelnuovo () and Giovanni Caggiano

No 8985, CESifo Working Paper Series from CESifo

Abstract: We employ a nonlinear VAR framework and a state-of-the-art identification strategy to document the large response of real activity to a financial uncertainty shock during and in the aftermath of the great recession. We replicate this evidence with an estimated DSGE framework featuring a concept of uncertainty comparable to that in our VAR. We then use the estimated framework to quantify the output loss due to the large uncertainty shock that materialized in 2008Q3. We find such a shock to be able to explain about 60% of the output loss in the 2008-2014 period. The same estimated model unveils the role successfully played by the Federal Reserve in limiting the output loss that would otherwise have occurred had monetary policy been conducted as in normal times. Finally, we show that the rule estimated during the great recession is able to deliver an economic outcome closer to the flexible price one than the rule describing the Federal Reserve's conduct in normal times.

Keywords: uncertainty shock; nonlinear IVAR; nonlinear DSGE framework; minimum-distance estimation; great recession (search for similar items in EconPapers)
JEL-codes: C22 E32 E52 (search for similar items in EconPapers)
Date: 2021
New Economics Papers: this item is included in nep-dge, nep-mac, nep-mon and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3) Track citations by RSS feed

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Related works:
Journal Article: UNCERTAINTY AND MONETARY POLICY DURING THE GREAT RECESSION (2023) Downloads
Working Paper: Uncertainty and Monetary Policy during the Great Recession (2021) Downloads
Working Paper: UNCERTAINTY AND MONETARY POLICY DURING THE GREAT RECESSION (2021) Downloads
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