Uncertainty and Monetary Policy in Good and Bad Times

We investigate the role played by systematic monetary policy in the United States in tackling the real effects of uncertainty shocks in recessions and expansions. We model key indicators of the business cycle with a nonlinear vector autoregression model that allows for different dynamics in busts and booms. Uncertainty shocks are identified by focusing on historical events that are associated with jumps in financial volatility. Our results show that uncertainty shocks hitting in recessions trigger a more abrupt drop and a faster recovery in real economic activity than in expansions. Gounterfactual simulations suggest that the effectiveness of systematic US monetary policy in stabilising real activity in the aftermath of an uncertainty shock is greater in expansions. Finally, we provide empirical and narrative evidence pointing to a risk management approach by the Federal Reserve.

View the full Research Discussion Paper at https://www.rba.gov.au/publications/rdp/2017/pdf/rdp2017-06.pdf

Dr Gabriela Nodari

Dr. Gabriela Nodari

Economist, Economic Analysis Department, Reserve Bank of Australia

Gabriela Nodari is an economist at the Macroeconomic Modelling division of the Reserve Bank of Australia. She is also an Ambassador of the RBA’s Public Access and Education Program, and has given a number of educational talks to external audiences. Prior to joining Macro Modelling, she worked in the Research Department of the RBA. Her research interests and expertise are in the area of monetary policy using techniques based on time series econometrics and network analysis. She has published in international academic journals on topics including economic uncertainty and fiscal policy. Dr Nodari obtained her Ph.D. in Economics and Finance from the University of Verona in 2015. She has a M.A. in lnternational Economics and a B.A. in Business Administration and Economics. She completed a postdoctoral research fellowship at UNSW Sydney, and has been a research visitor at the Reserve Bank of New Zealand, before joining the RBA in early 2016.