Measuring Cross Country Monetary Policy Uncertainty, Accessible Data
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Figure 1. Monetary Policy Uncertainty Index
Figure 1 displays our MPU indexes together with our U.S. index for Canada, euro area, Japan, and U.K. in the first four panels. In each case, the sample ends in July 2016. These series spike on several key dates, especially as evidenced by the large values recorded for Canada in the early 1990s (NAFTA), and in Japan at the onset of the global financial crisis, after the tsunami, and just prior to the unveiling of Abenomics. Large spikes in the Euro Area correspond quite closely to those in the United States, where the index spikes around the September 11 attacks, the March 2003 invasion of Iraq, and prior to the October 2015 FOMC meeting (in which 'liftoff uncertainty' seemed to have peaked). In the case of the United Kingdom, monetary policy uncertainty also peaks around 9/11 and the Iraq invasion, but not prior to Fed liftoff. Our MPU indexes thus fluctuate substantially during the period when policy rates were at the effective 'zero' lower bound: from late 2008 in the U.S. and late 2009 in the Euro Area. Finally, note the large effect of the June 23, 2016 'Brexit' vote. We display the U.S. MPU index in the fifth and last panel of the figure.
Figure 2. MPU Index vs. EPU Index
Figure 2 displays our monetary policy indexes against the Baker, Bloom, and Davis (2016a) overall economic policy uncertainty index (EPU), by country in each of the five panels. We observe some similarities between EPU and our more narrowly-focused measure of MPU, but also many differences. For the United States, Canada, Euro Area, Japan, and United Kingdom respectively, the correlations are .23, .50, .33, .14, and .30. Note from the UK panel that MPU at the time of Brexit is dwarfed by overall EPU.
Figure 3. Dollar-Pound 3-Month Risk Reversal, 2015-2016
Figure 3 displays the daily three-month ahead dollar-pound risk reversal, in a sample that includes the June 23, 2016 referendum on Brexit. There is a gradual decline prior to March 23, when the referendum date first comes into the three-month ahead window, and very sharp decline on that date: increased demand for protection against a crash in the pound, provided by the put options, drove the price of puts up and the risk reversal down. Risk reversals are a measure of skewness in the foreign exchange market. A risk reversal is the difference between the implied volatility of an out-of-the-money foreign currency call option (giving the right to buy currency, at a specified price) and put option (right to sell, at a given price). Risk reversals are widely used to insure against currency depreciation, and hence are a measure of 'crash risk'.
Figure 4. Impulse Responses to U.S. Shocks
Figure 4 and 5 display the impulse responses, by country, to a shock to U.S. MPU and own-country MPU, respectively. There are four panels in each figure, for each non-U.S. country. In each case, foreign MPU responds positively and significantly to U.S. shocks, an effect that is insignificantly different from zero after two months. The responses to own-country MPU are shown in the four panels of Figure 5. They are about twice as large and significant for about twice as many months compared to the responses to U.S. shocks in Figure 4.
Figure 5. Impulse Responses to Own-Country Shocks
Figure 4 and 5 display the impulse responses, by country, to a shock to U.S. MPU and own-country MPU, respectively. There are four panels in each figure, for each non-U.S. country. In each case, foreign MPU responds positively and significantly to U.S. shocks, an effect that is insignificantly different from zero after two months. The responses to own-country MPU are shown in the four panels of Figure 5. They are about twice as large and significant for about twice as many months compared to the responses to U.S. shocks in Figure 4.
Figure 6. MPU Index Around FOMC Meetings
Figure 6 displays that there is a rise in U.S. MPU in the days prior to FOMC meetings which dissipates very quickly after the meeting. It also shows that after the FOMC began to rely increasingly on forward guidance beginning in December 2008, the pre-meeting rise in U.S. MPU is greatly muted and peaks one day sooner, compared to the period February 1994-November 2008.
Figure 7. Foreign MPU Around Foreign Central Bank Meetings
Figure 7 displays the movements in our foreign MPU indexes around their own monetary policy meeting days. There are four panels, by country (Canada, Euro Area, Japan, and UK respectively). Uncertainty rises prior to policy setting meeting days, peaks on the day after the meeting, the first day of newspaper coverage, and dissipates immediately after. This pattern is especially pronounced for Canada and Japan. This is consistent with our earlier U.S. results.
Figure 8. Foreign MPU Index Around FOMC Meetings
Figure 8 displays movements in foreign MPU around FOMC meeting days. There are again four panels. For all four countries and in each sub-period, there do appear to be consistent increases in uncertainty in the days prior to FOMC meetings, as well as a quick dissipation afterward. However, this pattern is muted relative to the pattern observed prior to own central bank meeting days. The plots suggest that uncertainty arises more from country-specific factors relating to the individual countries' monetary policy setting meetings than from uncertainty that surrounds FOMC meetings, although both are relevant.