Risk management-driven policy rate gap

Abstract

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. Show more