The Term Structure of Monetary Policy Uncertainty

Brent Bundick, Trenton Herriford and Andrew Smith

No RWP 2022-02, Research Working Paper from Federal Reserve Bank of Kansas City

Abstract: This paper studies the transmission of Federal Reserve communication to financial markets and the economy using new measures of the term structure of policy rate uncertainty. Movements in the term structure of interest rate uncertainty around FOMC announcements cannot be summarized by a single measure but instead are two dimensional. We characterize these two dimensions as the level and slope factors of the term structure of interest rate uncertainty. These two monetary policy uncertainty factors significantly help to explain changes in Treasury yields and forward real interest rates around FOMC announcements, even after accounting for changes in the expected path of policy rates. Moreover, we demonstrate that focusing on just a single dimension of monetary policy uncertainty provides an inaccurate description of how policy uncertainty shapes the transmission of FOMC announcements. Finally, our policy uncertainty factors provide stronger first-stage instruments in a proxy SVAR setting which implies more expansionary macroeconomic effects of forward guidance than those estimated only using the expected path of policy rates.

Keywords: Monetary Policy Uncertainty; Forward Guidance; Proxy VAR (search for similar items in EconPapers)
JEL-codes: E32 E52 (search for similar items in EconPapers)
Pages: 41
Date: 2022-02-25
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Related works:
Journal Article: The Term Structure of Monetary Policy Uncertainty (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedkrw:93837

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DOI: 10.18651/RWP2022-02

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