Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/279156 
Year of Publication: 
2023
Series/Report no.: 
CESifo Working Paper No. 10407
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
We find that macroeconomic uncertainty plays a significant role in U.S. monetary policy. First, we construct a measure of uncertainty as felt by policymakers at the time of making their rate-setting decisions. This measure is derived from a real-time, Bayesian estimation of a small monetary VAR with time-varying parameters. We use it to calculate the probability of being in a high-uncertainty regime. Second, we estimate a monetary policy reaction function that, apart from macroeconomic uncertainty, includes Greenbook forecasts, revisions of those forecasts, and a measure of stock market volatility. Using data for the period 1969 - 2008, we find that policymakers set an interest rate that is significantly lower in a high-uncertainty regime, compared to a low-uncertainty regime.
Subjects: 
monetary policy
uncertainty
real-time data
Bayesian VAR
time-varying coefficients
JEL: 
E52
E58
E01
D81
Document Type: 
Working Paper
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