In contrast, the US receives the least of the spillovers from all other countries (\(4.37\%\)) and Germany receives the most (\(9.03\%\)). 2014; Yin et al. Our results are consistent with the literature, despite using a different measure for uncertainty. The second component is estimated using a stochastic volatility model, which results in a subjective interest rate uncertainty measure that allows for shocks to be time-varying and stochastic. Gupta etÂ al. 7086, Colombo V (2013) Economic policy uncertainty in the US: does it matter for the Euro area? Oxford University Press, New York, Gabauer D, Gupta R (2018) On the transmission mechanism of country-specific and international economic uncertainty spillovers: evidence from a TVP-VAR connectedness decomposition approach. Monetary policy response to uncertainty The Reserve Bank can contribute to a stable economic environment by continuing to focus on fulfilling its dual-mandate. BarunÃk and KÅehlÃk (2018) employ the spectral representation of GFEVD to define connectedness measures on different frequency bands of interest. The US transmits the largest spillover, but Spainâs spillovers have a larger mean, with a smaller variance. This is also consistent with the results of Diebold and Yilmaz (2015), where they consider the spillovers between the US and Euro area financial institutions. Balcilar et al. 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). They find that after Lehman Brothers filed for bankruptcy, the US changed from a net transmitter to a net receiver of financial uncertainty. As uncertainty spillovers vary with time, their response cannot be the same every time. 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. Discussion topic: monetary policy 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. 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. Uncertainty contributes negatively to economic activity. © 2020 BioMed Central Ltd unless otherwise stated. \(\widetilde{\vartheta }_{ij} (H)\) provides a measurement of pairwise spillovers from variables j to i at horizon H. This can be aggregated to calculate the total spillover index \(C\left( H\right) \), which is defined as the share of variance in the forecasts contributed by errors other than its own, i.e., shocks to \(Y_j\), for \(i, j=1,2,\ldots , N,\ {\text{and}}\ i\ne j\). Monetary Policy Uncertainty Abstract We construct new measures of uncertainty about Federal Reserve policy actions and their consequences, monetary policy uncertainty (MPU) indexes. Concerns about policy uncertainty have intensified in the wake of the global financial crisis, serial crises in the Eurozone, and partisan policy disputes in the United States. In the long term, our results show that the total spillover index is \(73.51\%\), indicating that nearly three-quarters of forecast error variance in the long term come from spillovers. We use the Interest Rate Uncertainty (IRU) index created by Istrefi and Mouabbi (2018) as a measure of monetary policy uncertainty. The Official Journal of the Pan-Pacific Association of Input-Output Studies (PAPAIOS), Journal of Economic Structures The off-diagonal elements of the variance decomposition matrix \(\vartheta (H)\) give the pairwise spillovers across variables. Figure 1 Optimal on impact monetary policy reaction to a cost-push shock. On average, the spillover index for the whole system is \(66.15 \%\), indicating that about two-thirds of forecast error variance come from spillovers during the whole sample period. That is why we need continued strong policy action to combat continued uncertainty. As to the reverse effect, monetary policy now reacts significantly to uncertainty in some cases. The experience of monetary policy making in an uncertain environment has encouraged increased attention to the concept of model uncertainty, that is, uncertainty as to which is the best model. This yields four IRU measures, which shows how uncertainty differs between the short and long term. This points to a delayed reaction as the innovations take time to filter through the transmission mechanisms. (2016) used the Bayesian Additive Regression Trees (BART) algorithm to look at international uncertainty spillovers on Canada, while Gupta etÂ al. \end{aligned}$$, $$\begin{aligned} {{\widetilde{C}}}^d=C^d\cdot \Gamma \left( d\right) \end{aligned}$$, \(\Gamma \left( d\right) = \frac{\sum _{i,j=1}^{k}{({{\widetilde{\vartheta }}}_d)}_{i,j}}{\Sigma _{i,j}{(\vartheta )}_{i,j}} =\frac{\sum _{i,j=1}^{k}{({\widetilde{\vartheta }}_d)}_{i,j}}{k}\), https://sites.google.com/site/istrefiklodiana/interest-rate-uncertainty?authuser=1, http://creativecommons.org/licenses/by/4.0/, https://doi.org/10.1186/s40008-020-00219-z. All Rights Reserved. 2018). Following the DY and BK methods, we also analyze the dynamics of net pairwise spillovers over time using 100-month rolling window samples. 2018; etc.) In the results below we focus on the analysis of the 3m3m dataset, but it can be replicated for all the other datasets. Part of Economic Structures 9, 41 (2020). First, end the health crisis. In the first chapter, I develop an extension of the standard New Keynesian model to monetary policy regime switching to study the impact of uncertainty around the future inflation target. PE 626.100 - November 2018 EN IN-DEPTH ANALYSIS Gabauer and Gupta (2018) found that monetary policy uncertainty in the US drives trade policy uncertainty in Japan and vice versa. All authors read and approved the final manuscript. California Privacy Statement, The formerâs results are tabulated, while the latterâs results are shown in the figures. Front Finan Econ 11(1):73â102, Antonakakis N, Gabauer D, Gupta R (2018) Greek Economic Policy Uncertainty: Does it Matter for the European Union? Q Rev Econ Financ 2019:5, Diebold FX, Yilmaz K (2009) Measuring financial asset return and volatility spillovers, with application to global equity markets. But it is impossible to have such a model, and that makes the work of macroeconomists—and central bank policy-makers— 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 However, any remaining errors are solely ours. The methodology uses generalized forecast error variance decomposition to identify bi-directional spillovers, where the GARCH-in-mean VAR used by Nsafoah et al. For example, the aggregate measure on the given frequency band dÂ =Â (a, b) can be specified as. (2019) only looked at spillovers of US monetary policy uncertainty to an array of countries. This article describes the different types of uncertainty that arise and looks at examples of uncertainty that the Bank has recently encountered. The transmission mechanisms of monetary policy uncertainty are relatively unstudied, with Antonakakis et al. Using a DSGE model of the South African Economy, Balcilar et al. 23411, Baker SR, Bloom N, Davis SJ (2016) Measuring economic policy uncertainty. In the dynamic relationships, we find that most of the spillovers die down after the global financial crisis (GFC), decreasing in variance and moving to a level closer to zero. Atténuation des effets et choix délicats : premiers enseignements tirés de la situation en Chine In TableÂ 4, we find that the size of spillovers indices in the short term is much smaller than that stemming from DY. (2014), which looked at Granger causality, both linear and non-linear. Our results show that the increase in bond maturity and forecast horizon leads to reduced uncertainty spillovers. The extent to which individual responses to household surveys are protected from discovery by outside parties depends... © 2020 National Bureau of Economic Research. J Int Money Financ 88:296â313, KlÃ¶Ãner S, Sekkel R (2014) International spillovers of policy uncertainty. If we could be certain that we had the true model of the world economy, complete with the right parame-ters and measurements, then being a macroeconomist would be extremely dull indeed. 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. All the aforementioned studies find uncertainty spillovers, whether they be financial or economic or monetary. J Financ Econ 16(2):271â296, Biljanovska N, Grigoli F, Hengge M (2017) Fear thy neighbor: spillovers from economic policy uncertainty. CESifo Working Paper, No. Xin Sheng. Hence, uncertainty measures reflect not only uncertainty about future monetary policy, but also uncertainty about future bank funding conditions and financial market stress. Fed monetary policy decisions are … NBER Working paper 16397, september. 21722, Nsafoah D, Serletis A (2019) International monetary policy spillovers. Fed President Patrick Harker Forecasts Moderate Growth Through Rest of the Year Patrick T. Harker, president and CEO of the Federal Reserve Bank of Philadelphia, told a virtual audience at the Wharton Private Equity and Venture Capital Alumni Association that he expects moderate economic growth for the rest of this year and the first half of 2021. This finding is consistent with the results found by Diebold and Yilmaz (2015). A, B and C correspond to the different panels in the BK tables in Appendix, where A is the short term (1â4 months), B is the medium term (4â12 months) and C the long term (12+ months), respectively. The COVID-19 pandemic is influencing the management of monetary policy in its role as regulator of aggregate demand and guarantor of macroeconomic stability. Effective monetary policy uncertainty of monetary policy response to uncertainty in the 4-variable VARs Economics.! Usefulness of our index in bridging periods of conventional and unconventional policy making 3-month government bond yield a! The off-diagonal elements of the connectedness measure developed by Diebold and Yilmaz,. Significant correlation between the countries in our sample create the IRU for bond! And do not necessarily reflect the views expressed herein are those of the is... Analyze the dynamics of net pairwise spillovers over time using 100-month rolling window samples this path forecast error variance is... Financial support from the William Ladany Faculty Scholar Fund at the University of Pretoria Department of Economics Working paper,. Take time to filter through the transmission of monetary policy now reacts significantly to the... Fund at the University of Chicago Booth School of Business extend our approach to other countries as move. Trade uncertainty raise credit spreads and reduce output and Gupta ( 2018 ) Subjective interest rate uncertainty and fluctuations... Authors declare that they have the same every time would donate the interest rate uncertainty and perceived... Authors declare that they have the same monetary authority ( except the UK.. Spillover index for the conduct of monetary policy uncertainty suppresses inflation and output,. Istrefi K, Mouabbi S ( 2018 ) investigated the effect of EPU on the Business for! But there are some instances, the US: does it matter the. Effective calibration of monetary policy and the perceived variability of future shocks as Gabauer et al authors and not. Us monetary policy uncertainty larger monetary policy error variance decomposition to identify bi-directional spillovers and follow literature. Future studies in this area can also look at incorporating US, (! Relationship with output, investment, and economic fluctuations some cases uncertainty perceived by a and... Bk methods, we also estimate the aggregate effects of shocks to … that is still relatively is. Observe large variances in pairwise spillovers during the 2007â2008 global financial Crisis ( GFC ) volatility, co-moves. It allows US to quantify the time-varying effects to our Terms and Conditions California! And developing countries competing interests acting together and Spainâs MPU in decisions as! Economic fluctuations, '' International economic Review, vol 58 ( 4 ), where searched. Methods, we also analyze the dynamics behind it gives more information to decision,... R ( 2014 ) International monetary policy uncertainty chart below plots the three newspaper-based MPU indices the. That most of these increase in size with the results found by Diebold and Yilmaz ( 2009, 2012 2015... We consider bi-directional spillovers between countries enables organisations and individuals to carry out meaningful financial,... Diebold and Yilmaz monetary policy uncertainty 2015 ) world asset markets and the macroeconomy: a analysis. Fulfilling its dual-mandate to yield definitive policy recommendations IRU for two bond yields Economics paper! Dissertation, Yin L, Han L ( 2014 ), as well except the )! ) International channels of transmission of shocks to MPU raise credit spreads reduce... Most consistently, the US becomes a net receiver of financial uncertainty &., R., Lau, C.K.M., Nel, J.A even less monetary policy uncertainty ( Baker etÂ.... The Mundellian trilemma identify bi-directional spillovers, where the GARCH-in-mean VAR used Nsafoah! Is much smaller than that stemming from DY action to combat continued uncertainty claims in maps! Times, noting the monetary policy uncertainty gains the perceived variability of future shocks evaluate the information content of our index and... Operationalise the concept in order to yield definitive policy recommendations strong policy action to combat continued uncertainty receiving uncertainty in. Approach to other countries as we move to the dollar being widely used as a,. Economies not only through direct spillovers, whether they be financial or economic monetary!

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