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The Relationship between Monetary Policy and Uncertainty in Advanced Economies: Evidence from Time- and Frequency-Domains

Semih Cekin (), Besma Hkiri (), Aviral Tiwari () and Rangan Gupta ()
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Semih Cekin: Department of Economics, Turkish-German University
Besma Hkiri: College of Business, University of Jeddah, Saudi Arabia

No 201904, Working Papers from University of Pretoria, Department of Economics

Abstract: In this work we offer new insight into the relationship between interest rates and uncertainty for several advanced economies (Canada, EU, Japan, UK, US) for the period 2003-2018. For this purpose, we utilize the wavelets methodology, which allows us to analyze how the relationship changes over time and across different frequencies and to make inference about causality. To analyze a wide range of frequencies, and because our analysis contains the post-2008 period as well, we use the daily shadow interest rate measure of Krippner (2012, 2013) to capture the stance of monetary policy making at the zero lower bound. We also use the daily uncertainty measure by Scotti (2016), which measures uncertainty related to the real economy. Our findings suggest that there is significant comovement across time and across different frequencies in all the countries we analyze. Corresponding to the similar, yet different conduct of monetary policy, we also find that the relationship exhibits different characteristics and causality in all the economies we analyze, implying that one must be careful not to draw generalized conclusions.

Keywords: Interest Rate; Uncertainty; Advanced Economies; Wavelet (search for similar items in EconPapers)
JEL-codes: C22 E52 E58 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac and nep-mon
Date: 2019-01
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