Monetary Policy Uncertainty and Economic Fluctuations [report]

Drew Creal, Jing Cynthia Wu
2014 unpublished
Uncertainty associated with the monetary policy transmission mechanism is a key driving force of business cycles. To investigate this link, we propose a new term structure model that allows the volatility of the yield curve to interact with macroeconomic indicators. The data favors a model with two volatility factors, that capture shortterm and long-term monetary policy uncertainty. Increases in either of them lead higher unemployment rates, but they interact with inflation in opposite directions.
doi:10.3386/w20594 fatcat:ervdiknegjepzfjmvq5prkak2y