| By: |
Lakdawala, Aeimit (Michigan State University, Department of Economics);
Bauer, Michael (Federal Reserve Bank of San Francisco);
Mueller, Philippe (Warwick Business School) |
| Abstract: |
This paper investigates the role of monetary policy uncertainty for the
transmission of FOMC actions to financial markets using a novel model-free
measure of uncertainty based on derivative prices. We document a systematic
pattern in monetary policy uncertainty over the course of the FOMC meeting
cycle: On FOMC announcement days uncertainty tends to decline substantially,
indicating the resolution of policy uncertainty. This decline is then reversed
over the first two weeks of the intermeeting FOMC cycle. Both the level and
the changes in uncertainty play an important role for the transmission of
monetary policy to financial markets. First, changes in uncertainty have
substantial effects on a variety of asset prices that are distinct from the
effects of the conventional policy surprise measure. For example, the Fed's
forward guidance announcements affected asset prices not only by adjusting the
expected policy path but also by changing market-perceived uncertainty about
this path. Second, at high levels of uncertainty a monetary policy surprise
has only modest effects on assets, whereas with low uncertainty the impact is
significantly more pronounced. |
| Keywords: |
monetary policy uncertainty; Federal Reserve; event study; monetary transmission; implied volatility |
| JEL: |
E43 E44 E47 |
| Date: |
2019–04–12 |
| URL: |
http://d.repec.org/n?u=RePEc:ris:msuecw:2019_002&r=all |