Risk management-driven policy rate gap

Vol: 
34/2018
Author name: 
Caggiano G
Castelnuovo E
Nodari G
Year: 
2018
Month: 
July
Abstract: 

We employ real-time data available to the US monetary policy makers to estimate a Taylor rule augmented with a measure of financial uncertainty over the period 1969-2008. We find evidence in favor of a systematic response to financial uncertainty over and above that to expected inflation, output gap, and output growth. However, this evidence regards the Greenspan-Bernanke period only. Focusing on this period, the “risk-management” approach is found to be responsible for monetary policy easings for up to 75 basis points of the federal funds rate.

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