October 2017

Monetary Policy Uncertainty

Lucas Husted, John Rogers, and Bo Sun


We construct new measures of uncertainty about Federal Reserve policy actions and their consequences -- monetary policy uncertainty (MPU) indexes. We show that, under a variety of VAR identification schemes, positive shocks to uncertainty about monetary policy robustly raise credit spreads and reduce output. The effects are of comparable magnitude to those of conventional monetary policy shocks. We evaluate the usefulness of our MPU indexes, and examine the influence of Fed communication. Our analysis suggests that policy rate normalization that is accompanied by reduced uncertainty can help neutralize the contractionary effects of the rate increases themselves.
Supplemental data (.xlsx)

Keywords: Monetary policy uncertainty, VAR identification, FOMC communication

DOI: https://doi.org/10.17016/IFDP.2017.1215

PDF: Full Paper

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Last Update: January 09, 2020