Risk Management-Driven Policy Rate Gap

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.

Keywords: risk management-driven policy rate gap, uncertainty, monetary policy, Taylor rules, real-time data

JEL Classification: C200, E400, E500

Suggested Citation: Suggested Citation

Caggiano, Giovanni and Castelnuovo, Efrem and Nodari, Gabriela, Risk Management-Driven Policy Rate Gap (August 08, 2018). CESifo Working Paper Series No. 7177, Available at SSRN: https://ssrn.com/abstract=3254208 or http://dx.doi.org/10.2139/ssrn.3254208