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Dynamic effects of monetary policy shocks on macroeconomic volatility

Mumtaz, Haroon and Theodoridis, Konstantinos 2020. Dynamic effects of monetary policy shocks on macroeconomic volatility. Journal of Monetary Economics 114 , pp. 262-282. 10.1016/j.jmoneco.2019.03.011

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We develop a VAR that allows the estimation of the impact of monetary policy shocks on volatility. Estimates for the US suggest that an increase in the policy rate by 1% is associated with a rise in unemployment and inflation volatility of about 15%. Using a New Keynesian model, with search and matching labour frictions and Epstein-Zin preferences we show that these volatility effects are driven by the coexistence of agents’ fears of unemployment and concerns about the (in) ability of the monetary authority to reverse deviations from the policy rule with the impact magnified by the agents’ preferences.

Item Type: Article
Date Type: Publication
Status: Published
Schools: Business (Including Economics)
Publisher: Elsevier
ISSN: 0304-3932
Date of First Compliant Deposit: 22 March 2019
Date of Acceptance: 26 March 2019
Last Modified: 09 Oct 2021 12:29

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