Working Paper: NBER ID: w20594
Authors: Drew D. Creal; Jing Cynthia Wu
Abstract: 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 favors 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 vary across different historical episodes.
Keywords: Monetary Policy; Uncertainty; Economic Fluctuations
JEL Codes: C5; E4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Monetary policy uncertainty (E49) | Economic activity (E29) |
| Monetary policy uncertainty (E49) | Unemployment rates (J64) |
| Term premium uncertainty (G19) | Economic activity (E29) |
| Unemployment rate shocks (J64) | Term premium uncertainty (G19) |
| Unemployment rate shocks (J64) | Monetary policy uncertainty (E49) |