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Market-Based Monetary Policy Uncertainty

Aeimit Lakdawala, Michael Bauer () and Philippe Mueller
Additional contact information
Philippe Mueller: Warwick Business School

No 2019-2, Working Papers from Michigan State University, Department of Economics

Abstract: This paper investigates the role of monetary policy uncertainty for the transmission of FOMC actions to financial markets using a novel model-free measure of uncertainty based on derivative prices. We document a systematic pattern in monetary policy uncertainty over the course of the FOMC meeting cycle: On FOMC announcement days uncertainty tends to decline substantially, indicating the resolution of policy uncertainty. This decline is then reversed over the first two weeks of the intermeeting FOMC cycle. Both the level and the changes in uncertainty play an important role for the transmission of monetary policy to financial markets. First, changes in uncertainty have substantial effects on a variety of asset prices that are distinct from the effects of the conventional policy surprise measure. For example, the Fed's forward guidance announcements affected asset prices not only by adjusting the expected policy path but also by changing market-perceived uncertainty about this path. Second, at high levels of uncertainty a monetary policy surprise has only modest effects on assets, whereas with low uncertainty the impact is significantly more pronounced.

Keywords: monetary policy uncertainty; Federal Reserve; event study; monetary transmission; implied volatility (search for similar items in EconPapers)
JEL-codes: E43 E44 E47 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2019-04-12
New Economics Papers: this item is included in nep-cba, nep-ifn, nep-mac and nep-mon
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Working Paper: Market-based monetary policy uncertainty (2019) Downloads
Working Paper: Market-Based Monetary Policy Uncertainty (2019) Downloads
Working Paper: Market-Based Monetary Policy Uncertainty (2019) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:ris:msuecw:2019_002

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