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MONETARY POLICY UNCERTAINTY AND ECONOMIC FLUCTUATIONS
Author(s) -
Creal Drew D.,
Wu Jing Cynthia
Publication year - 2017
Publication title -
international economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.658
H-Index - 86
eISSN - 1468-2354
pISSN - 0020-6598
DOI - 10.1111/iere.12253
Subject(s) - economics , volatility (finance) , monetary policy , shock (circulatory) , inflation (cosmology) , econometrics , term (time) , monetary economics , stochastic volatility , macroeconomics , medicine , physics , quantum mechanics , theoretical physics
We investigate the relationship between uncertainty about monetary policy and its transmission mechanism, and economic fluctuations. We propose a new term structure model where the second moments of macroeconomic variables and yields can have a first‐order effect on their dynamics. The data favor a model with two unspanned volatility factors that capture uncertainty about monetary policy and the term premium. Uncertainty contributes negatively to economic activity. Two dimensions of uncertainty react in opposite directions to a shock to the real economy, and the response of inflation to uncertainty shocks varies across different historical episodes.