Norges Bank

Working Paper

Economic uncertainty and the effectiveness of monetary policy

Knut Are Aastveit, Gisle James Natvik and Sergio Sola
Working Paper

This paper explores if economic uncertainty alters the macroeconomic influence of monetary policy. We consider several measures of U.S. economic uncertainty, and estimate their interaction effects with monetary policy shocks as identified through structural vector autoregressions. We find that monetary policy shocks affect economic activity considerably weaker when uncertainty is high, consistently with "real-options" effects suggested by models with non-convex adjustment costs. Investment responds two to five times weaker when uncertainty is in its upper instead of its lower decile. High U.S. uncertainty is associated with lower policy influence not only domestically, but in Canada too.

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ISSN 1502-8143 (online)

Published 2 July 2013 12:00
Published 2 July 2013 12:00