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monetary policy uncertainty

In some instances, the US becomes a net receiver of uncertainty, such as after the GFC in particular. By using this website, you agree to our Econ J 119(534):158–171, Diebold FX, Yilmaz K (2012) Better to give than to receive: predictive directional measurement of volatility spillovers. 2017; Caggiano et al. The uncertainty effect of COVID-19 hits … There are even spillovers between different types of uncertainty (risk), as Gabauer et al. As a consequence, investors demand even lower term premia. The estimated contributions to the forecast error variance of US uncertainty from other countries are relatively small, ranging from \(0.49\%\) (Italy) to \(17.16\%\) (Canada). Our results are consistent with the literature, despite using a different measure for uncertainty. The US, Germany, France, and Spain are the most consistent transmitters of monetary policy uncertainty, while Sweden and Japan are the most consistent receivers of uncertainty spillovers. For high levels of persistence the opposite becomes true – the optimal monetary policy should be more aggressive than in the full information case, and the degree of aggressiveness should increase as uncertainty becomes larger. Monetary Policy Uncertainty and Economic Fluctuations, The 2020 Martin Feldstein Lecture: Journey Across a Century of Women, Summer Institute 2020 Methods Lectures: Differential Privacy for Economists, The Bulletin on Retirement and Disability, Productivity, Innovation, and Entrepreneurship, Conference on Econometrics and Mathematical Economics, Conference on Research in Income and Wealth, Improving Health Outcomes for an Aging Population, Measuring the Clinical and Economic Outcomes Associated with Delivery Systems, Retirement and Disability Research Center, The Roybal Center for Behavior Change in Health, Training Program in Aging and Health Economics, Transportation Economics in the 21st Century. The pairwise spillovers in the US show that, after the crisis, there are instances where this factor is a negative net transmitter (i.e., a net receiver) of uncertainty. Globalization has made countries more connected, which can lead to problems, as seen in the Global Financial Crisis (GFC). Table 1 shows that connectedness decreases with a longer forecast horizon for both bond yields and both methodologies. The data favors a model with two unspanned volatility factors that capture uncertainty about monetary policy and the term premium. J Financ Econ 16(2):271–296, Biljanovska N, Grigoli F, Hengge M (2017) Fear thy neighbor: spillovers from economic policy uncertainty. Using a DSGE model of the South African Economy, Balcilar et al. University of Pretoria Department of Economics Working Paper Series, No. Table 2 shows the net movements for all the countries, where a positive value represents a net transmission and a negative value indicates a net reception. The spillovers between the European countries are small in the short and medium terms but large in the long term, in the 3-month bond yields at a 3-month forecast horizon dataset. Data for the 10-year yields start 4 years prior to the 3-month yields, so 48 should be added to that of the 3-month yield to obtain the same date. 23411, Baker SR, Bloom N, Davis SJ (2016) Measuring economic policy uncertainty. A monetary policy framework for the European Central Bank to deal with uncertainty Monetary Dialogue November 2018 Policy Department for Economic, Scientific and Quality of Life Policies . On average, innovations from Spain are responsible for \(13.59 \%\) of the error variance in forecasting uncertainty of these countries, while only \(1.11 \%\) comes from innovations to Japan. Most of the literature uses the Economic Policy Uncertainty (EPU) index created by Baker et al. 7086, Colombo V (2013) Economic policy uncertainty in the US: does it matter for the Euro area? 2017a; Biljanovska et al. The COVID-19 pandemic has fuelled a significant or even, according to some measures, unprecedented increase in economic uncertainty. This is expected, as they have the same monetary authority (except the UK). We report the estimation results for monetary policy uncertainty spillovers using the Diebold and Yilmaz (2009, 2012, 2015) (hereafter DY) method in Tables 3, 5, 7, and 9 and the Baruník and Křehlík (2018) (hereafter BK) method in Tables 4, 6, 8, and 10. Part of We calculate the net movements by subtracting the uncertainty receptions from the transmissions (TO-FROM, in the tables). For the other bond yields and horizons, there are large spillover indices (relative to its own) between some of the European countries (France, Germany, Italy, Spain, Sweden, and UK). We also find that the US is a net transmitter of uncertainty for most of the samples, but there are some instances where it is a net receiver. Policy uncertainty (also called regime uncertainty) is a class of economic risk where the future path of government policy is uncertain, raising risk premia and leading businesses and individuals to delay spending and investment until this uncertainty has been resolved. The within connectedness (WTH in the BK tables) shows the spillovers within the frequency band and the frequency connectedness (ABS in the BK tables) splits the DY connectedness measure into the different frequency bands. J Macroecon 57:317–337, Gupta R, Pierdzioch C, Risse M (2016) On international uncertainty links: BART-based empirical evidence for Canada. The methodology calculates a spillover index in the generalized VAR setting of Pesaran and Shin (1998) in which forecast error variance decomposition is independent of variable ordering. Econ Lett 143:24–27, Istrefi K, Mouabbi S (2018) Subjective interest rate uncertainty and the macroeconomy: a cross-country analysis. We also find that the US is a net transmitter of uncertainty for most of the samples, but there are some instances where it is a net receiver. We would like to thank three anonymous referees for many helpful comments. Monetary policy uncertainty quickly dissipated before the December 2015 meeting when the Fed actually raised the interest rate, strongly suggesting that Fed communication strategy was at least somewhat effective. The data favors a model with two unspanned volatility factors that capture uncertainty about monetary policy and the term premium. Table 1 gives the summary of the total spillovers of both methods, while Table 2 gives the net movements of all the countries for both methods. Figure 1 Optimal on impact monetary policy reaction to a cost-push shock. Displaying the importance of monetary policy uncertainty spillovers, Gabauer and Gupta (2018) found that monetary policy uncertainty is the main driver of EPU, followed by fiscal, then currency and finally trade policy uncertainty. Istrefi and Mouabbi (2018) create the IRU by looking at 3- and 12-month forecasts from Consensus Economics surveys. This measures the contributions of spillovers of shocks across countries to the total forecast error variance. statement and \(\vartheta _{ij}\left( H\right) \) captures the contribution of variable j to the variance of the forecast error of variable i, at horizon H, providing a measure of pairwise spillovers from variable j to i. Due to data availability, we consider the following periods: for the 3m3m dataset—Jan 1999 to Jul 2015, 3m12m—Jan 1999 to Oct 2014, 10y3m—Jan 1995 to Jul 2015 and for 10y12m—Jan 1995 to Oct 2014. Fed monetary policy decisions are … We examine whether monetary policy uncertainty influences the reaction of the equity, Treasury security, foreign exchange and crude oil markets, as well as medium-term interest rates, to U.S macroeconomic announcements. This points to a time-varying nature in monetary policy uncertainty spillovers and should be accounted for when estimating a model that includes monetary policy uncertainty. This paper was formerly titled “Term Structure of Interest Rate Volatility and Macroeconomic Uncertainty” and “Interest Rate Uncertainty and Economic Fluctuations”. Hence, uncertainty measures reflect not only uncertainty about future monetary policy, but also uncertainty about future bank funding conditions and financial market stress.

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