The Impact of the Volatility of Monetary Policy Shocks

Mumtaz, Haroon; Zanetti, Francesco

doi:10.1111/jmcb.12015

Cited by 194 publications

(159 citation statements)

References 34 publications

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“…However, re-estimating the VAR but excluding the relevant time period (1998Q4-2001Q4) 24 from the sample, we find that our results continue to hold, and if anything are actually reinforced. Specifically, the share of fluctuations in activity attributed to idiosyncratic uncertainty shocks increases significantly 23 Breaking the sample at different points during the mid-1980s to 1990 yields similar results.…”

Section: Robustness To Structural Breakssupporting

confidence: 55%

What Drives Business Cycle Fluctuations: Aggregate or Idiosyncratic Uncertainty Shocks?

Bijapur

2015

SSRN Journal

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We study jointly the roles of aggregate and idiosyncratic uncertainty shocks in driving business cycle fluctuations. By decomposing total stock return volatility of over 20,000 publicly-listed US firms from 1962 to 2012, we construct separate indices for aggregate and idiosyncratic uncertainty, and run a horse race between them in an otherwise standard macroeconomic VAR. We find that idiosyncratic uncertainty shocks account for a large fraction of fluctuations in economic activity at business cycle frequencies, whereas the impacts of aggregate uncertainty are negligible. Idiosyncratic uncertainty, and not aggregate uncertainty, shocks produce the "sharp drop and rapid rebound" response in activity characterized in Bloom (2009). Idiosyncratic uncertainty shocks to large firms have more powerful macroeconomic impacts than small firms, suggesting "Granular" origins to the role of uncertainty in the macroeconomy. We also find evidence of an economy-wide "buffering effect", in which the effects of large and small firms' shocks exhibit a negative covariance which dampens down the aggregate effects of idiosyncratic uncertainty shocks on economic fluctuations.

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Section: Robustness To Structural Breakssupporting

confidence: 55%

What Drives Business Cycle Fluctuations: Aggregate or Idiosyncratic Uncertainty Shocks?

Bijapur

2015

SSRN Journal

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“…As an example it is not completely certain how the SARB reacts to exchange rate depreciations -especially considering that pass-through effects to inflation are time varying ( Jooste and Jhaveri, 2014). Uncertainty about future policy affects agents' expectations such that perceived changes have real and nominal effects (Mumtaz and Zanetti, 2013).…”

Section: Introductionmentioning

confidence: 99%

“…In contrast to Primiceri (2005) their SVAR specification allows for a direct feedback of volatility shocks on the level variables of interest. Mumtaz and Zanetti (2013) highlight that volatility is important for at least three reasons: volatility of structural shocks have increased (this corresponds to the size of volatility estimates obtained by Primiceri, 2005); volatility is a concern for policy makers; and a key number of papers have identified channels in which uncertainty affects the economy. Their paper complements the work by Bloom (2009) andFernández-Villaverde et al (2015) in providing an empirical channel of volatility shocks on the economy where the source emanates from the monetary policy authorities.…”

Section: Introductionmentioning

confidence: 99%

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South Africa’s economic response to monetary policy uncertainty

Balcılar

Gupta

Jooste

2017

JES

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Purpose -The purpose of this paper is to study the evolution of monetary policy uncertainty and its impact on the South African economy. Design/methodology/approach -The authors use a sign restricted SVAR with an endogenous feedback of stochastic volatility to evaluate the sign and size of uncertainty shocks. The authors use a nonlinear DSGE model to gain deeper insights about the transmission mechanism of monetary policy uncertainty. Findings -The authors show that monetary policy volatility is high and constant. Both inflation and interest rates decline in response to uncertainty. Output rebounds quickly after a contemporaneous decrease. The DSGE model shows that the size of the uncertainty shock matters -high uncertainty can lead to a severe contraction in output, inflation and interest rates. Research limitations/implications -The authors model only a few variables in the SVAR -thus missing perhaps other possible channels of shock transmission. Practical implications -There is a lesson for monetary policy: monetary policy uncertainty, in isolation from general macroeconomic uncertainty, often creates unintended adverse consequences and can perpetuate a weak economic environment. The tasks of central bankers are incredibly difficult. Their models project output and inflation with relatively large uncertainty based on many shocks emanating from various sources. It matters how central bankers react to these expectations and how they communicate the underlying risks associated with setting interest rates. Originality/value -This is the first study that looks into monetary policy uncertainty into South Africa using a stochastic volatility model and a nonlinear DSGE model. The results should be very useful for the Central Bank as it highlights how uncertainty, that they create, can have adverse economic consequences.

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“…In the wake of the 2008 financial crisis, the monetarists warned that prolonged low interest rate may result in serious and undesirable economic consequences, for example, eroding the function of money as a store of value, and more importantly is the inability of the interest rate in promoting output-oriented investment (Schwartz, 2009;Gomis-Porqueras and Sanches, 2011;Wright, 2011;Schmidt, 2012;Mumtaz and Zanetti, 2012). However, empirical studies have failed to resolve these issues as they have been inconclusive (Thornton, 2010;Hamilton and Wu, 2012;Gambacortia et al, 2014).…”

Section: IImentioning

confidence: 99%

The Possible Tragedy of Quantitative Easing: An IS-LM Approach

2015

SSRN Journal

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The object of this paper is to demonstrate the possible risks of quantitative easing in the long run. The analysis is conducted in the conventional framework of IS-LM curves in a sequential model, which assumes that the independence of supply and demand curves does not necessarily hold. It is established that this lack of independence coupled with a very flat (or kinked) IS curve may lead to falls in income in second period as a consequence of quantitative easing. Such easing may alter the behavior of investors who get encouraged to undertake very risky and leveraged investments. Thus, short term gains may be outweighed by long term losses from quantitative easing. In some cases such easing may create bubbles in the economy, for example, in the housing and stock markets which collapse at some point in time.Keywords: interest rate, quantitative easing, IS-LM framework, non-independence of supply and demand curves. JEL classifications: E40, E50

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The Impact of the Volatility of Monetary Policy Shocks

Cited by 194 publications

References 34 publications

What Drives Business Cycle Fluctuations: Aggregate or Idiosyncratic Uncertainty Shocks?

What Drives Business Cycle Fluctuations: Aggregate or Idiosyncratic Uncertainty Shocks?

South Africa’s economic response to monetary policy uncertainty

The Possible Tragedy of Quantitative Easing: An IS-LM Approach

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