Uncertainty and Monetary Policy in the US: A Journey into Non-Linear Territory

Giovanni Pellegrino

Melbourne Institute Working Paper Series from Melbourne Institute of Applied Economic and Social Research, The University of Melbourne

Abstract: This paper estimates a non-linear Interacted VAR model to assess whether the real effects of monetary policy shocks are milder during times of high uncertainty. In a novel way, uncertainty, i.e., the conditioning indicator discriminating “high†and “low†uncertainty states, is modeled endogenously in the VAR and is found to reduce after an expansionary shock. Generalized Impulse Response Functions à la Koop, Pesaran and Potter (1996) suggest that monetary policy shocks are significantly less powerful during uncertain times, with the peak reactions of a battery of real variables being about two-thirds milder than those during tranquil times. Among the theoretical explanations proposed by the literature, real option effects and precautionary savings appear the ones supported by our results.

Keywords: Monetary policy shocks; Non-Linear Structural Vector Auto-Regressions; Interacted VAR; Generalized Impulse Response Functions; uncertainty (search for similar items in EconPapers)
JEL-codes: C32 E32 E52 (search for similar items in EconPapers)
Pages: 59pp
Date: 2017-02
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 (24)

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Related works:
Journal Article: Uncertainty and monetary policy in the US: A journey into nonlinear territory (2021)
Working Paper: Uncertainty and Monetary Policy in the US: A Journey into Non-Linear Territory (2020)
Working Paper: Uncertainty And Monetary Policy In The US: A Journey Into Non-Linear Territory (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:iae:iaewps:wp2017n06

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