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Unconventional monetary policy shocks in OECD countries: how important is the extent of policy uncertainty?

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Abstract

We study the effects of unconventional monetary policy shocks on output, inflation and uncertainty using a sign restricted panel VAR over the monthly period of 2008:1–2015:1. Our sample includes primarily OECD countries (Canada, Germany, France, Italy, Japan, Spain, UK and US) that reached the interest rate zero lower bound in response to the recent financial crisis. Central bank balance sheets are used to gauge the size of unconventional monetary policy reactions to the crisis. We control for the degree of uncertainty by estimating the economic response to balance sheet shocks in two economic states: high versus low uncertainty. We use sign restrictions to identify our shocks, but remain agnostic regarding price and output responses to balance sheet shocks. We show that the mean group response of prices and output increases in response to monetary policy. The results, however, vary by country and are sensitive to the degree of uncertainty. Prices and output do not necessarily increase uniformly across countries.

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Notes

  1. See Belke and Kronen 2016 for a more detailed treatment between hysteresis, uncertainty and investment.

  2. Results available upon request.

  3. We also estimated thresholds to split the series into high-vs. low uncertainty. The threshold values are estimated using a Threshold regression (TAR). The threshold values are close to the simple calculated averages. Results available upon request.

  4. The results are robust to different lag lengths, and to different ordering of the variables.

  5. Uhlig (2005) shows that the effects of monetary policy shocks on output are not clear.

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Acknowledgements

We would like to thank two anonymous reviewers for many helpful comments, and the Editor, Professor Christian Richter, for giving us an extension with the deadline for the revision of the paper. However, any remaining errors are solely ours.

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  1. Department of Economics, University of Pretoria, Pretoria, 0002, South Africa

    Rangan Gupta & Charl Jooste

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  1. Rangan Gupta
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  2. Charl Jooste
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Correspondence to Charl Jooste.

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Gupta, R., Jooste, C. Unconventional monetary policy shocks in OECD countries: how important is the extent of policy uncertainty?. Int Econ Econ Policy 15, 683–703 (2018). https://doi.org/10.1007/s10368-017-0380-8

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