1. The non-linear impact of monetary policy on shifts in economic policy uncertainty: evidence from the United States of America.
- Author
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Dima, Bogdan and Dima, Ștefana Maria
- Subjects
ECONOMIC uncertainty ,ECONOMIC policy ,MONETARY policy ,INVESTORS ,CONSUMER confidence ,FINANCIAL security - Abstract
A stochastic volatility estimation of VIX index's latent volatility is used for the United States of America, as a proxy for the adjustments in the levels of investors' uncertainty related to current and future economic policies. The impact of monetary policy stance on such measure is examined in the framework of the distributed lag non-linear models (DLNM). We place this analysis in the literature stream emphasizing the various sources of heterogeneity concerning investors' expectations. The main finding is that the monetary policy does impact non-linearly the adjustments in investors' predictions. While a tighter monetary policy does generally contribute to an increase in VIX's latent volatility, the shape of such effect varies across different GLM and GAM specifications of DLNM. This outcome remains robust, even if: (1) we control for the global price of Brent crude and consumers' confidence; (2) we use, instead of the stochastic framework, a Markov-switching GARCH-based estimator; or (3) we replace the monetary policy instrument with monetary policy uncertainty. We argue that accounting for its nonlinear effects on financial markets is of critical importance for the design of a monetary policy pursuing global financial stability. [ABSTRACT FROM AUTHOR]
- Published
- 2024
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