Herro, Nicholas and Murray, James (2011): Dynamics of Monetary Policy Uncertainty and the Impact on the Macroeconomy.
Download (360Kb) | Preview
A large literature lauds the benefits of central bank transparency and credibility, but when a central bank like the U.S. Federal Reserve has a dual mandate, is not specific to the extent it targets employment versus price stability, and is not specific to the magnitude interest rates should change in response to these targets, market participants must depend largely on past data to form expectations about monetary policy. We suppose market participants estimate a Taylor-like regression equation to understand the conduct of monetary policy, which likely guides their short-run and long-run expectations. When the Federal Reserve's actions deviate from its historical targets for macroeconomic variables, an environment of greater uncertainty may be the result. We quantify this degree of uncertainty by measuring and aggregating recent deviations of the federal funds rate from econometric forecasts predicted by constant gain learning. We incorporate this measure of uncertainty into a VAR model with ARCH shocks to measure the effect monetary policy uncertainty has on inflation, output growth, unemployment, and the volatility of these variables. We find that a higher degree of uncertainty regarding monetary policy is associated with greater volatility of output growth and unemployment.
|Item Type:||MPRA Paper|
|Original Title:||Dynamics of Monetary Policy Uncertainty and the Impact on the Macroeconomy|
|English Title:||Dynamics of Monetary Policy Uncertainty and the Impact on the Macroeconomy|
|Keywords:||Uncertainty; learning; volatility; Taylor rule; vector autoregression; ARCH.|
|Subjects:||E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations; Cycles
E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level; Inflation; Deflation
E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies
|Depositing User:||James Murray|
|Date Deposited:||25. Apr 2011 06:23|
|Last Modified:||12. Feb 2013 03:55|
BERNANKE, B. S., AND F. S. MISHKIN (1997): ``Inflation targeting: A new framework for monetary policy?,'' Journal of Economic Perspectives, 11, 97-116.
BULIR, A., K. SMIDKOVA, V. KOTLAN, AND D. NAVARTIL (2008): ``Inflation targeting and communication: It pays off to read inflation reports,'' IMF Working Paper No. 08/234.
CECCHETTI, S. G., AND M. EHRMANN (2002): ``Does inflation targeting increase output volatility? An international comparison of policymakers' preferences and outcomes,'' in Monetary policy: Rules and transmission mechanisms, ed. by N. Loayza, and K. Schmidt-Hebbel. Santiago, Chile.
CECCHETTI, S. G., A. FLORES-LANGUNES, AND S. KRUASE (2006): ``Has monetary policy become more efficient? A cross-country analysis,'' The Economic Journal, 116, 408-433.
CECCHETTI, S. G., AND S. KRAUSE (2002): ``Central bank structure, policy efficiency, and macroeconomic performance: exploring empirical relationships,'' Federal Reserve Bank of St. Louis Review, pp. 47-60.
CLARIDA, R., J. GALI, AND M. GERTLER (2000): ``Monetary policy rules and macroeconomic stability: Evidence and some theory,'' Quarterly Journal of Economics, 115, 147-180.
EVANS, G. W., AND S. HONKAPOHJA (2001): Learning and expectations in macroeconomics. Princeton University Press.
EVANS, G. W., AND S. HONKAPOHJA (2008): ``Expectations, learning and monetary policy: An overview of recent research,'' Centre for Dynamic Macroeconomic Analysis Working Paper CDMA08/02.
FOUNTAS, S. (2001): ``The relationship between inflation and inflation uncertainty in the UK: 1985-1998,'' Economic Letters, 74, 77-83.
FOUNTAS, S., AND M. KARANASOS (2007): ``Inflation, output growth and nominal and real uncertainty: Empirical evidence for the G7,'' Journal of International Money and Finance, 26, 229-250.
FOUNTAS, S., M. KARANASOS, AND J. KIM (2002): ``Inflation and output growth uncertainty and their relationship with inflation and output growth,'' Economic Letters, 75, 293-301.
FOUNTAS, S., M. KARANASOS, AND J. KIM (2006): ``Inflation uncertainty, output growth uncertainty and macroeconomic performance,'' Oxford Bulletin of Economics and Statistics, 68, 319-343.
GRIER, K. B., O. T. HENRY, N. OLEKALNS, AND K. SHIELDS (2004): ``The asymetric effects of uncertainty on inflation and output growth,'' Journal of Applied Econometrics, 19, 551-565.
GRIER, K. B., AND M. J. PERRY (2000): ``The effects of real and nominal uncertainty on inflation and output growth: Some GARCH-M evidence,'' Journal of Applied Econometrics, 15, 45-58.
MCCALLUM, B. T. (1997): ``Issues in the Design of Monetary Policy Rules,'' NBER Working Paper No. 6016.
MILANI, F. (2007): ``Expectations, learning and macroeconomic persistence,'' Journal of Monetary Economics, 54, 2065-2082.
ORPHANIDES, A. (2003): ``Historical monetary policy analysis and the Taylor rule,'' Journal of Monetary Economics, 50, 983-1022.
SLOBODYAN, S., AND R. WOUTERS (2008): ``Learning in an estimated medium-sized DSGE model,'' Working Paper.
TAYLOR, J. (1993): ``Discretionary versus policy rules in practice,'' Carnegie-Rochester Conference Series on Public Policy, 39, 195-214.
TAYLOR, J. B. (1999): ``A historical analysis of monetary policy rules,'' in Monetary policy rules, ed. by J. B. Taylor. University of Chicago Press. conomics, 54, 2065-2082.