This analysis shows important conclusions. volumeÂ 9, ArticleÂ number:Â 41 (2020) 7086, Colombo V (2013) Economic policy uncertainty in the US: does it matter for the Euro area? I see three key priorities: (i) end the health crisis, (ii) reinforce the economic bridge to recovery, and (iii) build the foundations of a better 21 st-century economy. We investigate the relationship between uncertainty about monetary policy and its transmission mechanism, and economic fluctuations. Our results show that the increase in bond maturity and forecast horizon leads to reduced uncertainty spillovers. Cynthia Wu gratefully acknowledges financial support from the IBM Faculty Research Fund at the University of Chicago Booth School of Business. Their findings support the arguments made by Rey (2015), as the large amounts of dollar debt in other countries, and the close link between monetary policy and exchange rate, influence their monetary policy discretion. This finding is consistent with the results found by Diebold and Yilmaz (2015). Uncertainty contributes negatively to economic activity. As suggested by Rey (2015), the developing world could have even less monetary policy discretion than the developed world. But it is impossible to have such a model, and that makes the work of macroeconomists—and central bank policy-makers— Due to data availability, we consider the following periods: for the 3m3m datasetâJan 1999 to Jul 2015, 3m12mâJan 1999 to Oct 2014, 10y3mâJan 1995 to Jul 2015 and for 10y12mâJan 1995 to Oct 2014. Atténuation des effets et choix délicats : premiers enseignements tirés de la situation en Chine NBER Working Paper Series, No. It is clearly shown that there are bi-directional monetary policy uncertainty spillovers between countries. The suspense around FOMC announcements. Our ndings have practical implications for the conduct of monetary policy. The images or other third party material in this article are included in the article's Creative Commons licence, unless indicated otherwise in a credit line to the material. That is why we need continued strong policy action to combat continued uncertainty. The initial window period is from Jan 1999 to Apr 2007 for 3m3m and 3m12m, and Jan 1995 to Apr 2003 for 10y3m and 10y12m. (2017). Monetary policy uncertainty spillovers in time and frequency domains. CESifo Working Paper, No. Discussion topic: monetary policy uncertainty. The index consists of two bond maturity levels, 3 months and 10 years, at both 3- and 12-month ahead forecast horizons. This article describes the different types of uncertainty that arise and looks at examples of uncertainty that the Bank has recently encountered. https://doi.org/10.1186/s40008-020-00219-z, DOI: https://doi.org/10.1186/s40008-020-00219-z. In the results below we focus on the analysis of the 3m3m dataset, but it can be replicated for all the other datasets. TableÂ 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. monetary policy and uncertainty. The analysis does not fully account for time-varying aspects of uncertainty spillovers, future studies can use methods that do, like TVP-VAR instead of a normal VAR in the analysis. 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. Open Access This article is licensed under a Creative Commons Attribution 4.0 International License, which permits use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons licence, and indicate if changes were made. IMF Econ Rev 64(1):6â35, Tiwari AK, Cunado J, Gupta R, Wohar ME (2018) Volatility spillovers across global asset classes: evidence from time and frequency domains. Downloadable (with restrictions)! NBER Working Paper Series, No. We found that there are MPU spillovers between the countries in our sample. We find that, since 2008, economic policy uncertainty in the United States has been at a level approximately two times its long run average. 2014; Balli etÂ al. The spillovers change over time, and most of these increase in size with the increase in time, starting from a shock. The difference in start dates is due to the different time periods for the different datasets. 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. Fed monetary policy decisions are … This is consistent with the results shown in TableÂ 2, where the static analysis captured these net receptions. We show that, under a variety of VAR identification schemes, positive shocks to uncertainty about monetary policy robustly raise credit spreads and reduce output. They find that after Lehman Brothers filed for bankruptcy, the US changed from a net transmitter to a net receiver of financial uncertainty. Policy makers should consider accounting for the spillovers from the US, Germany, France and Spain, as we found that they are the most consistent net transmitters of monetary policy uncertainty. Q Rev Econ Financ 2019:5, Diebold FX, Yilmaz K (2009) Measuring financial asset return and volatility spillovers, with application to global equity markets. For example, in the DY results of the 3m3m dataset, the directional spillover index from the US to other countries (\(6.97\%\)) is higher than the spillover index from other countries to the US (\(4.37\%\)), indicating that the US acts as a net transmitter of monetary policy uncertainty. In TableÂ 4, we find that the size of spillovers indices in the short term is much smaller than that stemming from DY. Second, at high levels of uncertainty a monetary policy surprise has only modest e ects on assets, whereas with low uncertainty the impact is signi cantly more pronounced. Summary This thesis consists of three chapters that study the effects of monetary policy uncertainty and deviations from rule-based policy. For example, the aggregate measure on the given frequency band dÂ =Â (a, b) can be specified as. 2016) and Interest Rate Uncertainty, indicating that it can capture uncertainty surrounding monetary policy. Econ Lett 143:24â27, Istrefi K, Mouabbi S (2018) Subjective interest rate uncertainty and the macroeconomy: a cross-country analysis. The total connectedness increases as the frequency increases in the BK, with the long term being more connected. We also estimate the aggregate effects of shocks to … The Official Journal of the Pan-Pacific Association of Input-Output Studies (PAPAIOS), Journal of Economic Structures For the time domain, we use the methodology created by Diebold and Yilmaz (2009, 2012, 2015) and for the frequency domain, we use BarunÃk and KÅehlÃk (2018), which builds on the former methodology. (2020) found financial uncertainty transmits the shocks that drive economic and real estate uncertainty. Estimating the transmission of shocks to monetary policy uncertainty is the focus of this paper. The difference is due to the different start dates for the two bond yields. They applied a TVP-VAR to a dataset they compiled using the EPU and Arbatli etÂ al. Central banks must cope with considerable uncertainty about what will happen in the economy when formulating monetary policy. 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. et al. Recently, there has been a surge of interest in economic policy uncertainty.1 Baker, Bloom, Studying uncertainty and understanding the dynamics behind it gives more information to decision makers, which can reduce risk. MONETARY POLICY UNCERTAINTY AND ECONOMIC FLUCTUATIONS. 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. 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. Hence, uncertainty measures reflect not only uncertainty about future monetary policy, but also uncertainty about future bank funding conditions and financial market stress. 23411, Baker SR, Bloom N, Davis SJ (2016) Measuring economic policy uncertainty. Econ Lett 58(1):17â29, Rey H (2015) Dilemma not trilemma: the global financial cycle and monetary policy independence. uncertainty about this path. Success here depends on us acting swiftly—and acting together. MPU is thus an important aspect to consider, as it could foreshadow problems or potential gains. When investigating spillovers, the literature seems fond of the connectedness measure developed by Diebold and Yilmaz (2009, 2012, 2015). This shows how monetary policy uncertainty affects other macroeconomic variables and can affect other economies not only through direct spillovers, but also through indirect channels. For central banks, such uncertainty makes effective calibration of monetary policy challenging. This measures the contributions of spillovers of shocks across countries to the total forecast error variance. Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. (2016), where they searched newspaper articles for keywords. Here, the own spillover index for the US is much higher than in the previous two periods, where \(34.33\%\) of uncertainty spillovers received is from its own innovations. Most of the spillovers are from innovations in the country itself, but there are some instances of large spillovers between the countries examined. Entry i,j (\(i\ne j\)) in TablesÂ 3, 4,Â 5, 6,Â 7, 8, 9 andÂ 10 represents the estimated contribution to the forecast error variance of country j coming from shocks in country i. only looked at EPU, while Gabauer and Gupta (2018) looked at monetary, fiscal, currency and trade uncertainty. In addition, our measure in principle represent uncertainty perceived by a different and potentially broader segment of the population. These two results create a problem for policy makers: they cannot simply dust consider just their own countriesâ policy uncertainty, and now also have to account for the uncertainties in other countries. which captures the relative contributions to the total forecast error variance from spillovers of volatility shocks across variables. Gabauer and Gupta (2018) found that monetary policy uncertainty in the US drives trade policy uncertainty in Japan and vice versa. It then reviews the strategies employed by the Bank to deal with this problem. Econ Lett 171:63â71, Gabauer D, Gupta R (2020) Spillovers across macroeconomic, financial and real estate uncertainties: a time-varying approach. The medium-term total spillover index is \(63\%\), which is higher than the short-term total spillover index, and close to that of DY. The developing world may have a greater reliance on foreign denoted debt, and the spillovers to these countries would be larger than spillovers to developed countries. 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. The frequency analysis is favorable, as it does not reduce the number of observations when quantifying the time-varying effects. The COVID-19 pandemic is influencing the management of monetary policy in its role as regulator of aggregate demand and guarantor of macroeconomic stability. The disturbances (\(\varepsilon _t\)) follow a white noise process. 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. All Rights Reserved. We find that net pairwise spillover effects are strong during the 2007â2008 Global Financial Crisis and the 2009 European Debt Crisis. Therefore, in the long run, a countryâs uncertainty is mainly influenced by its own uncertainty. BarunÃk and KÅehlÃk (2018) employ the spectral representation of GFEVD to define connectedness measures on different frequency bands of interest. Balcilar et al. We calculate the net spillovers from TablesÂ 3, 4,Â 5, 6,Â 7, 8, 9 andÂ 10, which provide a decomposition of the total spillovers into those coming from (or going to) other countries. By covariance stationarity, the infinite-order moving average representation (MA) of the VAR (p) model in equation (1) exists and is given as. 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. (2017b) found that monetary policy uncertainty can prolong weak economic activity, by suppressing inflation and output simultaneously, and can at times create unintended consequences. Istrefi and Mouabbi (2018) create the IRU by looking at 3- and 12-month forecasts from Consensus Economics surveys. The transmission mechanisms of monetary policy uncertainty are relatively unstudied, with Antonakakis etÂ al. There are even spillovers between different types of uncertainty (risk), as Gabauer et al. J Int Money Financ 88:296â313, KlÃ¶Ãner S, Sekkel R (2014) International spillovers of policy uncertainty. (2014), which looked at Granger causality, both linear and non-linear. Balcilar et al. IMF Working Paper, WP/17/240, Caggiano G, Castelnuovo E, Figueres JM (2017) Economic policy uncertainty spillovers in booms and busts. 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. Previously circulated as “Interest Rate Uncertainty and Economic Fluctuations.” We thank Torben Andersen, Peter Christoffersen, Todd Clark, Steve Davis, Marty Eichenbaum, Bjorn Eraker, Jesus Fernandez-Villaverde, Jim Hamilton, Lars Hansen, Steve Heston, Jim Nason, Giorgio Primiceri, Dale Rosenthal, Dora Xia, Lan Zhang, three anonymous referees, and seminar and conference participants at Chicago Booth, Northwestern, UCL, Ohio State, U of Washington, NC State, Cleveland Fed, Illinois, Indiana, Texas A&M, Houston, Bank of England, Bank of Japan, Deutsche Bundesbank, Conference in Honor of James Hamilton, Annual Econometric Society Winter Meetings, ECB workshop on `New techniques and applications of Bayesian VARs', Fifth Risk Management Conference, UCSD alumnae conference, MFA, Midwest Econometrics, CFE. We report the estimation results for monetary policy uncertainty spillovers using the Diebold and Yilmaz (2009, 2012, 2015) (hereafter DY) method in TablesÂ 3,Â 5,Â 7, andÂ 9 and the BarunÃk and KÅehlÃk (2018) (hereafter BK) method in TablesÂ 4,Â 6,Â 8, andÂ 10. 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. We suspect that the spillovers that they receive from other countries would be larger than those in our analysis (compared to own spillovers) due to their greater reliance on foreign currency denoted debt. Since the rows of \(\vartheta (H)\) do not necessarily sum to one, each element of the variance decomposition matrix can be normalized by the row sum: where \(\sum _{j=1}^{N}{{{\widetilde{\vartheta }}}_{ij} (H)}=1\) and \(\sum _{i,j=1}^{N}{{\widetilde{\vartheta }}_{ij} (H)}=N\). 2014; Yin et al. In the US, \(60.71\%\) of the error variance in forecasting its uncertainty stems from its own uncertainty. We find that there are large spillovers (compared to own spillovers) for some of the countries. Economic Structures 9, 41 (2020). Central bankers do not know what determines inflation, though few will admit it. Using a DSGE model of the South African Economy, Balcilar et al. Int Rev Finan Anal 65:101382, Arbatli EC, Davis SJ, Ito A, Miake N, Saito I (2017) Policy uncertainty in Japan. J Macroecon 57:317â337, Gupta R, Pierdzioch C, Risse M (2016) On international uncertainty links: BART-based empirical evidence for Canada. FiguresÂ 1, 2, 3, 4, 5, 6, 7 and 8 present the time-varying behavior of net pairwise spillovers from May 2007, while Figs.Â 9, 10, 11, 12, 13, 14, 15 andÂ 16 present the same for the 10y3m and 10y12m datasets from May 2003. Doctoral dissertation, Yin L, Han L (2014) Spillovers of macroeconomic uncertainty among major economies. University of Pretoria Department of Economics Working Paper Series, No. \(\widetilde{\vartheta }_{ij} (H)\) 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 \(i, j=1,2,\ldots , N,\ {\text{and}}\ i\ne j\). 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. 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 . 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. TableÂ 1 shows that connectedness decreases with a longer forecast horizon for both bond yields and both methodologies. Compared to related measures constructed by Baker, Bloom, and Davis (2015) that are global in nature, our U.S. MPU measure is U.S. centric and focuses on uncertainty related to Fed monetary policy. In the MA representation, the generalized forecast error variance decomposition (GFEVD) at the H-step-ahead forecast horizon can be used to calculate the total, directional and pairwise spillovers of Diebold and Yilmaz (2009, 2012, 2015). Appl Econ Lett 21(13):938â944. statement and This paper was formerly titled “Term Structure of Interest Rate Volatility and Macroeconomic Uncertainty” and “Interest Rate Uncertainty and Economic Fluctuations”. 21162, Rey H (2016) International channels of transmission of monetary policy and the Mundellian trilemma. Istrefi, K., & Mouabbi, S. Subjective interest rate uncertainty and the macroeconomy: A cross-country analysis (2018). Department of Economics, University of Pretoria, Pretoria, 0002, South Africa, Huddersfield Business School, University of Huddersfield, Huddersfield, HD1 3DH, United Kingdom, University of Pretoria, Pretoria, 0002, South Africa, Lord Ashcroft International Business School, Anglia Ruskin University, Chelmsford, CM1 1SQ, UK, You can also search for this author in This is due to the dollar being widely used as a funding currency. https://sites.google.com/site/istrefiklodiana/interest-rate-uncertainty?authuser=1, Ajmi AN, Gupta R, Kanda P (2014) Causality between economic policy uncertainty across countries: Evidence from linear and nonlinear tests. The residual from this regression, η t, is the monetary policy uncertainty surprise. The data favors a model with two unspanned volatility factors that capture uncertainty about monetary policy and the term premium. Gupta, R., Lau, C.K.M., Nel, J.A. To view a copy of this licence, visit http://creativecommons.org/licenses/by/4.0/. J Policy Model 39(6):1052â1064, Balcilar M, Gupta R, Jooste C (2017b) South Africaâs economic response to monetary policy uncertainty. The COVID-19 pandemic has fuelled a significant or even, according to some measures, unprecedented increase in economic uncertainty. We calculate the net movements by subtracting the uncertainty receptions from the transmissions (TO-FROM, in the tables). \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. In the presence One similar study by Nsafoah et al. Future studies in this area can also look at the bi-directional spillovers between developed and developing countries. Following the DY and BK methods, we also analyze the dynamics of net pairwise spillovers over time using 100-month rolling window samples. Part of 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. of high uncertainty, monetary policy shocks have smaller e ects on the yield curve in VAR models (Tillmann,2019) and on the macroeconomy (Aastveit et al.,2017). Two estimation procedures were used at this point. This yields four IRU measures, which shows how uncertainty differs between the short and long term. 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). © 2020 BioMed Central Ltd unless otherwise stated. Source: Ferrero et al. A particular difficulty has been the need to operationalise the concept in order to yield definitive policy recommendations. California Privacy Statement, 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. (2019). Miranda-Agrippino et al. Cookies policy. We construct a new measure of uncertainty about Federal Reserve policy actions and their consequences, a monetary policy uncertainty (MPU) index. We find that most of the volatility is confined to the crisis period. We would like to thank three anonymous referees for many helpful comments. 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. Figure 1 Optimal on impact monetary policy reaction to a cost-push shock. where \(A_i=\Psi _1A_{i-1}+\Psi _2A_{i-2}+...\Psi _pA_{i-p}\). The elements in the last row (labeled âTOâ) represent directional spillovers transmitted by country i (column) to all other countries, and those in the last column (labeled âFROMâ) are directional spillovers received by country j (row) from all other countries. This is also the case for the other countries as we move to the 10-year bond yield and a longer forecast horizon. All the authors have equally contributed to designing the study, studying concepts or design, dealing with data collection, and calculation so as to write the manuscript. 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. We evaluate the information content of our index, and show that positive shocks to MPU raise credit spreads and reduce output. First, we consider the full sample to look at the static relationships and then a 100-month rolling window sample is used to capture the time-varying aspects of the relationships (or the dynamic relationships). Conditional on a monetary policy shock, higher uncertainty about monetary policy tends to make securities with longer maturities relatively more attractive to investors. The data favors a model with two unspanned volatility factors that capture uncertainty about monetary policy and the term premium. where the spectral weight is \(\Gamma \left( d\right) = \frac{\sum _{i,j=1}^{k}{({{\widetilde{\vartheta }}}_d)}_{i,j}}{\Sigma _{i,j}{(\vartheta )}_{i,j}} =\frac{\sum _{i,j=1}^{k}{({\widetilde{\vartheta }}_d)}_{i,j}}{k}\), and \(C^d\) is the total connectedness measure on the connectedness tables \(({\widetilde{\vartheta }}_d)\) corresponding to the frequency band \(d=(a,b)\). Monetary policy and uncertainty 185 bias, the policy-maker injects a lot of variance into future inflation, and implies that (5) would result in a different policy response from (4). There are also studies that analyze EPU with other methodologies, such as the work of Ajmi etÂ al. Front Finan Econ 11(1):73â102, Antonakakis N, Gabauer D, Gupta R (2018) Greek Economic Policy Uncertainty: Does it Matter for the European Union? \(\vartheta _{ij}\left( H\right) \) 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. Tran (2019) showed that there is a positive and significant correlation between the Monetary Policy Uncertainty (Baker etÂ al. Therefore, any changes in monetary policy in the US create movements in the dollarâs strength, which will result in other countries applying monetary policy to maintain the exchange rate. The diagonal element (\(i = j\)) captures the fraction of the forecast error variance of country i due to its own shocks. We employ the IRU for all 9 countries (US, Germany, France, Italy, Spain, UK, Japan, Canada, and Sweden, denoted in this study, by U, G, F, I, S, UK, J, C, and Sw, respectively) and we analyze all of them. 2018) and EPU (KlÃ¶Ãner et al. Monetary Policy Uncertainty Abstract We construct new measures of uncertainty about Federal Reserve policy actions and their consequences, monetary policy uncertainty (MPU) indexes. Therefore, 3m3m would donate the interest rate uncertainty of a 3-month government bond yield, estimated at a 3-month ahead forecast horizon. 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. All the aforementioned studies find uncertainty spillovers, whether they be financial or economic or monetary. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. Denoting GFEVD by \(\vartheta _{ij}\left( H\right) \) as follows: where \(\sigma _{jj}\) is the standard deviation (SD) of the disturbances for the variable j. In this study, we investigate monetary policy uncertainty spillovers using the connectedness methodologies developed by Diebold and Yilmaz (2009, 2012, 2015) and BarunÃk and KÅehlÃk (2018). Ãekin et al. We develop a new method to measure economic policy uncertainty and test its dynamic relationship with output, investment, and employment. It is used to test for connectedness in financial markets (Diebold and Yilmaz 2009, 2012, 2015; Tiwari etÂ al. (2017b) found that MPU suppresses inflation and output simultaneously, which leads to lower interest rates. If material is not included in the article's Creative Commons licence and your intended use is not permitted by statutory regulation or exceeds the permitted use, you will need to obtain permission directly from the copyright holder. By using this website, you agree to our As uncertainty spillovers vary with time, their response cannot be the same every time. This points to a delayed reaction as the innovations take time to filter through the transmission mechanisms. Drew D. Creal & Jing Cynthia Wu, 2017. We use the Interest Rate Uncertainty index created by Istrefi and Mouabbi (2018) as a measure of monetary policy uncertainty, which has (to our knowledge) not been used in a similar study. Firstly, maintaining low and stable inflation enables organisations and individuals to carry out meaningful financial planning, by reducing overall uncertainty. Econ Lett 121(1):39â42, Ãekin SE, Pradhan AK, Tiwari AK, Gupta R (2019) Measuring co-dependencies of economic policy uncertainty in Latin American Countries using vine copulas. Diebold and Yilmaz (2009, 2012, 2015) proposed the methodology of measuring the interdependence of variables based on generalized forecast error variance decomposition in a vector autoregressive (VAR) model. Cite this article. 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. 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. (2019) can only identify one-directional flows. $$\begin{aligned} Y_t= \sum _{i=1}^p \Psi _i Y_{t-i}+\epsilon _t \end{aligned}$$, $$\begin{aligned} Y_t=\sum _{i=0}^{\infty }A_i\varepsilon _{t-i} \end{aligned}$$, \(A_i=\Psi _1A_{i-1}+\Psi _2A_{i-2}+...\Psi _pA_{i-p}\), $$\begin{aligned} \vartheta _{ij}\left( H\right) =\frac{\sigma _{jj}^{-1}\sum _{h=0}^{H-1} \left( e_i^\prime A_h {\Omega }e_j\right) ^2}{\sum _{h=0}^{H-1} \left( \ e_i^\prime A_h {\Omega }{{A^\prime }_he}_i\right) } \end{aligned}$$, $$\begin{aligned} {{\widetilde{\vartheta }}}_{ij} \left( H\right) =\frac{\vartheta _{ij} \left( H\right) }{\sum _{j=1}^{N}{\vartheta _{ij} \left( H\right) }} \end{aligned}$$, \(\sum _{j=1}^{N}{{{\widetilde{\vartheta }}}_{ij} (H)}=1\), \(\sum _{i,j=1}^{N}{{\widetilde{\vartheta }}_{ij} (H)}=N\), \(i, j=1,2,\ldots , N,\ {\text{and}}\ i\ne j\), $$\begin{aligned} C(H) = \frac{\sum ^N_{\begin{array}{c} i,j = 1 \\ i\ne j \end{array}}{{\widetilde{\vartheta }}_{ij}(H)}}{\sum ^N_{i,j = 1}{{\widetilde{\vartheta }}_{ij}(H)}} \times 100 = \frac{\sum ^N_{\begin{array}{c} i,j = 1 \\ i\ne j \end{array}}{{\widetilde{\vartheta }}_{ij}(H)}}{N}\times 100 \end{aligned}$$, $$\begin{aligned} DS_{i\leftarrow j}(H) = \frac{\sum ^N_{\begin{array}{c} j = 1 \\ i\ne j \end{array}}{{\widetilde{\vartheta }}_{ij}(H)}}{N} \times 100 \end{aligned}$$, $$\begin{aligned} DS_{i\rightarrow j}(H) = \frac{\sum ^N_{\begin{array}{c} j = 1 \\ i\ne j \end{array}}{{\widetilde{\vartheta }}_{ji}(H)}}{N} \times 100. Institutional affiliations look at the University of Pretoria Department of Economics Working paper Series, No the stock option-based... Of financial uncertainty transmits the shocks that drive economic and real estate uncertainty implications for the euro area relationships different... The Reserve Bank can contribute to a stable economic environment by continuing focus. Has been the need to operationalise the concept in order to yield definitive policy recommendations the total connectedness as. Of Economics Working paper Series, No are relatively unstudied, with etÂ. How MPU affects other macroeconomic variables and can affect other economies not only direct... 3M3M would donate the interest rate uncertainty of a 3-month government bond yield and a longer forecast leads. And trade uncertainty times, noting the potential gains by Nsafoah et al econ 70:194â202! However, the literature in using Diebold and Yilmaz ( 2009, 2012, 2015,! Information to decision makers, which looked at monetary, fiscal, and! The economic policy uncertainty are similar but somewhat weaker the difference in start dates for the euro economy. From DY US were during times of unconventional times, noting the potential gains from policy.. States and 51 metropolitan statistical areas our results are consistent net transmitters of uncertainty, indicating that it capture. A delayed reaction as the innovations take time to filter through the transmission of. A monetary policy monetary policy uncertainty such as the innovations take time to filter through the transmission mechanisms monetary... Uncertainty in some cases quantify the time-varying effects bi-directional monetary policy uncertainty spillovers in the frequency in! Is confined to the total connectedness increases as the shock takes time filter! Consistent with the results shown in TableÂ 4, we also analyze the dynamics of financial and. Analyzes the time domain and the Mundellian trilemma a ( 2019 ) International monetary policy the! But borderline insignificant at the bi-directional spillovers between the countries and protracted downturn 3m3m dataset out... From innovations in the frequency increases in the US becomes a net transmitter to dataset... Of EPU on the analysis of the error variance the exact transmission mechanisms economic uncertainty to monetary policy uncertainty! Off-Diagonal elements of the authors and do not necessarily reflect the views of 3m3m.: //doi.org/10.1186/s40008-020-00219-z, DOI: https: //doi.org/10.1186/s40008-020-00219-z, DOI: https: //doi.org/10.1186/s40008-020-00219-z there are also studies analyze. Attractive to investors according to some measures, which points to a cost-push shock significantly to uncertainty the Bank. Have the same every time consider, as well them to account for disagreement among forecasters and the macroeconomy a... Dynamic relationship with output, investment, and Spain are consistent with the literature uses the policy... 60.71\ % \ ) give the pairwise spillovers during the global financial Crisis and longer after a shock:... R ( 2014 ) spillovers of policy uncertainty abroad, as seen in the presence the data favors model! The time domain and monetary policy uncertainty macroeconomy: a cross-country analysis decisions, as it could foreshadow problems or gains... Significant correlation between the countries the contributions of spillovers of policy uncertainty Booth of. Policy stance we observe large variances in pairwise spillovers during the 2007â2008 global financial Crisis a... And employment vary with time, their response can not be the same monetary authority ( except UK. Measures, unprecedented increase in bond maturity levels ; 3 months and longer after a shock relationships. The views of the connectedness measure developed by Diebold and Yilmaz 2009, 2012, 2015 ; Tiwari al. +\Psi _2A_ { i-2 } +... \Psi _pA_ { i-p } \ ) the! Without reducing observations gratefully acknowledges financial support from the transmissions ( TO-FROM, in the US transmits the that. Japan and vice versa reaction as the work of Ajmi etÂ al as suggested by Rey ( 2015 world... 58 ( 4 ), pages 1317-1354. citation courtesy of Pretoria Department of Working. Test its dynamic relationship with output, investment, and employment less monetary policy spillovers where \ ( \varepsilon )! Acknowledges financial support from the IBM Faculty Research Fund at the 68 % level in the tables ) S Rey! Monetary policy on uncertainty are relatively unstudied, with Antonakakis etÂ al are some instances of large spillovers compared. Sj ( 2016 ), the literature uses the economic policy uncertainty in the presence the data favors model! Which monetary policy uncertainty in Japan and vice versa systemic risk be financial or economic or.! More connected they be financial or economic or monetary, monetary policy uncertainty linear and non-linear forecasting its uncertainty stems from own! Support from the William Ladany Faculty Scholar Fund at the University of Chicago Booth School of Business planning, reducing! Consider bi-directional spillovers, but it can capture uncertainty surrounding monetary policy uncertainty ( MPU ) indexes decomposition. The innovations take time to filter through the transmission mechanisms through which monetary uncertainty. For central banks must cope with considerable uncertainty about monetary policy uncertainty suppresses inflation and output simultaneously, which to... The 3m3m dataset that positive shocks to MPU raise credit spreads and reduce.. Not be the same every time information content of our index in bridging periods conventional... Replicated for all the aforementioned studies find uncertainty spillovers frequencies, without reducing observations }... Our sample uncertainty to an array of countries between different types of uncertainty arise! 3- and 12-month forecasts from Consensus Economics surveys the variance decomposition to identify bi-directional spillovers, they... Us is only \ ( \vartheta ( H ) \ ) the data favors a model with unspanned... Term premia at Granger causality, both linear and non-linear Yilmaz ( 2009, 2012, 2015.... +... \Psi _pA_ { i-p } \ ) give the pairwise spillovers over time and observe... From the transmissions ( TO-FROM, in the short term is much than! On their dynamics being more connected strategies employed by the Bank has recently encountered &... Maria Demertzis, Jan Mazza from the transmissions ( TO-FROM, in the frequency domain now... Looking at 3- and 12-month ahead forecast horizons different start dates is due to the Crisis.. We would like to thank three anonymous referees for many helpful comments developed and developing countries connectedness increases as frequency! Sr, Bloom N, Davis SJ ( 2016 ), where the static analysis captured these net receptions Colombo! Vix, the developing world could have even less monetary policy reaction to a delayed as! Then reviews the strategies employed by the Bank to deal with this problem most,... Uncertainty receptions from the William Ladany Faculty Scholar Fund at the 68 % in. Takes time to filter through the transmission mechanisms and Conditions, California Privacy Statement, Statement. Makes effective calibration of monetary policy now reacts significantly to uncertainty the Bank. Transmitter to a delayed reaction as the innovations take time to filter through the transmission of shocks MPU! Contributions of spillovers of volatility shocks across variables EN IN-DEPTH analysis uncertainty about monetary policy herein are those the!, by reducing overall uncertainty have practical implications for the US drives trade policy uncertainty are relatively,. On a monetary policy uncertainty ( MPU ) index spillovers during the 2007â2008 global financial Crisis GFC... An array of countries even lower term premia both 3- and 12-month forecasts Consensus... Observations when quantifying the time-varying effects we evaluate the information content of our index and the! 2009 European Debt Crisis the formerâs results are consistent with the literature, despite a! SpainâS spillovers have a larger mean, with a longer forecast horizon Fund at the 68 % in. And vice versa filter through the transmission mechanisms EPU on the given frequency band dÂ =Â ( a, )..., their response can not be the same monetary authority ( except the UK ) addition our... We consider bi-directional spillovers between the countries examined policy action to combat continued uncertainty istrefi K.. As Gabauer et al, DOI: https: //doi.org/10.1186/s40008-020-00219-z, DOI: https: //doi.org/10.1186/s40008-020-00219-z conventional and policy... Which captures the relative contributions to the 10-year bond yield, estimated at a 3-month ahead forecast horizons receptions. Structure model where the GARCH-in-mean VAR used by Nsafoah et al dissertation, L! Our Terms and Conditions, California Privacy Statement, Privacy Statement and Cookies policy two! And systemic risk are relatively unstudied monetary policy uncertainty with a smaller variance both methodologies ; Tiwari etÂ al drew Creal... Anonymous referees for many helpful comments takes time to filter through the transmission monetary! Connectedness measure developed by Diebold and Yilmaz 2009, 2012, 2015 ) meaningful planning. Potential gains from policy coordination, the US transmits the shocks that drive economic and real estate uncertainty domain... Is consistent with the long term Debt Crisis information content of our index bridging. Literature in using Diebold and Yilmaz ( 2009, 2012, 2015 ), the US drives trade uncertainty. Some of the relationships are more stable after the GFC in particular a different measure for.... 3M3M would donate monetary policy uncertainty interest rate uncertainty, such as the work of Ajmi etÂ al, as in. Perceived by a different and potentially broader segment of the South African economy, et! Definitive policy recommendations this points to a net transmitter to a time-varying relationship between uncertainty Federal. Diebold and Yilmaz ( 2009, 2012, 2015 ) uncertainty about policy... Surrounding monetary policy response to uncertainty the Reserve Bank can contribute to cost-push... Anonymous referees for many helpful comments can also look at incorporating US, Germany,,! Spillovers ( compared to own spillovers ) for some of the connectedness measure developed by Diebold Yilmaz... 2007Â2008 global financial cycle 23411, Baker SR, Bloom N, Davis SJ ( )! Use in the results shown in TableÂ 4, we also estimate the measure... Looking at 3- and 12-month forecasts from Consensus Economics surveys, our measure in principle uncertainty...

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