Monetary Policy Uncertainty Research Articles

Unveiling the Determinants of Saving-Consumption Relationship: A Panel Data Approach

The impact of uncertainty on saving is termed as precautionary saving. Thus, the main objective of this study is to investigate the effect of external global uncertainties on determining the saving-consumption relationship. In particular, we seek to compare the effect of two types of uncertainties, namely the monetary policy versus economic policy uncertainties in determining the behavior of saving-consumption. The results are compared between the top trade openness versus the least trade openness countries. Besides, the study also seeks to check for the existence and hence the effect of cross-section dependency in the relationship. For this purpose, the mean group (MG), pooled mean group (PMG) and common correlated effects mean group (CCEMG) estimators are applied. The data is from the year 1985 to 2017. The results reveal the existence and significance effect of cross-section dependence among countries and uncertainties matter in the saving-consumption relationship. The main factors that contribute to savings are the GDP per capita and the economic policy uncertainty while the main factors that contribute to consumptions are the GDP per capita and the monetary policy uncertainty.

Multi-Scale Risk Connectedness Between Economic Policy Uncertainty of China and Global Oil Prices in Time-Frequency Domains.

With a sample of monthly data from January 2000 to July 2021, this paper investigates the risk connectedness relationship between different kinds of China’s EPU and global oil prices in both time and frequency domains. To achieve that, a research framework mainly consists of wavelet transform method and spillover index approach is established. The results show that EPU of China receives the risk spillover from global oil prices in most cases. Moreover, we find fiscal policy uncertainty and trade policy uncertainty are generally the recipients of risk spillover on most time scales, except that monetary policy uncertainty primarily serves as the risk transmitter. Lastly, the risk role of exchange rate policy uncertainty in China has the most frequent change among four kinds of EPU. This paper provides valuable policy implications for policymakers, investors and risk managers in the energy market.

Monetary policy uncertainty, debt financing cost and real economic activities: Evidence from China

This paper studies how monetary policy uncertainty (MPU) propagates to real economic activities in China, and suggests that debt financing cost plays a pivotal role. Our empirical analysis, based on firm-level panel data, indicates that the rise in MPU leads to a significant increase in debt financing cost, which further reduces firm investment. The interacted VAR model based on macro-level data also suggests that the deflationary effect of MPU is intensified when debt level is high. Moreover, we present a theoretical framework of DSGE analysis to formalize how the rise in MPU depresses economic activities. Simulations featuring default risks and uncertainty shocks support evidence that MPU is transmitted to the real sector through debt financing cost channel.

Output fluctuations and portfolio flows to emerging economies: The role of monetary uncertainty

AbstractThis paper examines the role of monetary‐policy uncertainty (MPU) in driving business cycles in emerging economies. We employ a Bayesian vector autoregression model with stochastic volatility as the mean for different emerging economies. We find that MPU works as a crucial driver of business cycles in emerging economies. First, we show that an MPU shock can trigger instability in emerging economies by provoking risk/volatility in both financial and exchange‐rate markets. Second, an MPU shock can lead to a decline in both output growth and capital inflows in emerging economies. Our empirical results suggest that the central banks of emerging economies should attempt to improve transparency in their monetary policy‐making by increasing the effectiveness of public communication and forward guidance.

Monetary policy uncertainty and gold price in India: Evidence from Reserve Bank of India's Monetary Policy Committee (MPC) review

Fed's monetary policy review and interest rates contain essential information to explain asset price performance, including Gold, and it's incomparable because it delights both investors and consumers. The study aims to explore the effects of the Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) review on the Indian gold market considering scheduled MPC meetings. We consider 98 MPC meetings and essential governments' gold policies and regulations for the timeline 2005–2020. The empirical outcome states that the RBI's announcements matter for the gold market. A decrease in the gold price surrounding the meetings implies tightening monetary policy from a neutral state. Moreover, the INR/USD exchange rate plays a vital role in the gold price setting. MCX-futures and Spot market evidence show that a rise in the policy rates negatively impacts the Indian gold market. Indeed, interest rates change, and RBI's action has discouraged gold trading in India. The parameter estimates of the conditional volatility framework appear to be positive and statistically significant indicate volatility persistence following the monetary policy review and gold market volatility (GVZ). Hence, interest rates hold important implications for the gold trading community.

Cross-category spillover effects of economic policy uncertainty between China and the US: Time and frequency evidence

This study investigates the connectedness among three types of economic policy uncertainties, namely monetary, fiscal, and trade uncertainties, between China and the US. We used the spillover index measurement and the frequency-domain decomposition approach to detect the spillover effects of these categorical uncertainties from both the time- and frequency-domain perspectives. The results suggest that the spillover effects have time-varying characteristics, and some major events could sharply increase the spillover indices. More spillovers are mainly observed in the short-term, whereas the impacts of the medium- and long-term are limited. Furthermore, the leader of the spillover is monetary policy in China, but fiscal policy in the US, the spillovers of all uncertainties mainly exist domestically, apart from the US trade policy uncertainty. These results provide crucial implications for policymakers and investors, who should pay more attention to short-term spillovers and monetary policy uncertainty, which can mitigate their vulnerability to policy uncertainty shocks.

Exploring the asymmetric impact of economic policy uncertainty on China's carbon emissions trading market price: Do different types of uncertainty matter?

Carbon allowance is a market mechanism that is used to deal with climate change in the scientific community, and is gradually regarded as a financial asset. Uncertainty plays a vital role in affecting financial assets, and whether it affects carbon prices is an important question. Therefore, this article aims to examine the impact of four economic policy uncertainties (EPU) on China's carbon emissions trading (CET) market price from the year 2013 to 2021, by employing the nonlinear ARDL model and the asymmetric causality test. Empirical results show that the trade policy uncertainty (TPU) and monetary policy uncertainty (MPU), both positively affect the CET market price, while the exchange rate policy uncertainty (ECPU) comes with negative influences. Furthermore, the increase of TPU, MPU, and ECPU has a greater impact on the CET price. Our findings are consistent with the real effects of uncertainty shocks by Bloom (2009) who asserts that the uncertainty transfer mechanism has an asymmetric pattern. Therefore, policymakers should pay careful attention to the increasing fluctuations of different economic policies. Moreover, Chinese authorities should adopt firmer policy stances to avoid high volatility in the CET market price to achieve the goal of low-cost emission reductions through market mechanisms.

The Term Structure of Monetary Policy Uncertainty

FOMC announcements transmit to financial markets and the economy not only by changing the expected path of future interest rates but also by reshaping interest rate uncertainty across different horizons.

Monetary policy uncertainty and firm dynamics

This paper uses a FAVAR model with external instruments to show that monetary policy uncertainty shocks are recessionary and are associated with an increase in firms' exit and a decrease in firms' entry. At the same time, the stock price declines, while the TFP increases in the medium run. To explain this result, we build up and estimate a medium-scale DSGE model featuring firm heterogeneity and endogenous firm entry and exit. These features are crucial in matching the empirical responses. The baseline model outperforms an alternative model without firm dynamics in reproducing the FAVAR responses and implies a larger effect of monetary policy uncertainty shock on the real economic activity.

NONLINEAR SPILLOVER EFFECT OF US MONETARY POLICY UNCERTAINTY ON CHINA’S SYSTEMATIC FINANCIAL RISKS

Monetary policy uncertainty (MPU) not only imposes a great impact on the systematic financial risks of a country but also generates a significant spillover effect on countries having close economic exchanges with the former under the background of global economic integration. With the daily return rates of 64 listed financial companies in China from February 2006 to September 2020 used as the samples, China’s systematic financial risks were measured in this research by using long-run marginal expected shortfall (LRMES). On this basis, an FAVAR model with time-varying parameters was constructed to empirically investigate the spillover effect of US MPU on China’s systematic financial risks and its main transmission channels. Results showed that within the sample period (February 2006 – September 2020), US MPU generated a significant positive spillover effect on China’s systematic financial risks, namely, China’s systematic financial risks would be aggravated if the level of US MPU was elevated. From different time intervals, the spillover level was particularly high during global financial crises and global COVID-19 pandemic, indicating that the spillover effect of MPU is nonlinear and closely related to global major sudden risk events. Through the further research, it is found that this effect is mainly transmitted through short-term capital flow, interest rate, and economic uncertainty-induced channels, among which the short-term capital flow is the most important.

Connectedness of commodity, exchange rate and categorical economic policy uncertainties — Evidence from China

This paper provides a fresh perspective to explore the network correlations among commodity, exchange rate, and categorical economic policy uncertainties (EPU) in China. We try to contribute to the literature by examining the spillover mechanism with a relatively novel connectedness network using the monthly data over the period between June 2006 and January 2021. Our results suggest that prior to the recession, China’s commodity price is subject to greater spillovers from the exchange rate than recessions. The domestic commodity prices are more sensitive to monetary policy uncertainty and fiscal policy uncertainty. The occurrence of COVID-19 revises the dominance in the system from monetary policy uncertainty and fiscal policy uncertainty to trade policy uncertainty.

How Does Monetary Policy Uncertainty Influence Firms’ Dynamic Adjustment of Capital Structure

This study employs high-dimensional factors model to depict the development of monetary policy uncertainty (MPU) in China over the past decades and develops a logical analytical framework to analyze the effect of MPU on the dynamic adjustment of a firm’s capital structure through bank risk-taking channels. We investigate how MPU affects dynamic adjustment of a firm’s capital structure using a panel data set of China public manufacturers between 2007 and 2018 and find that the higher the MPU, the more detrimental it is to the dynamic adjustment of firm’s capital structure. Further, bank risk-taking plays the role of a financial stabilizer. In addition to the willingness to take risks in on-balance sheet operations and the scale of loans, the risk-taking of our banks may also be reflected in the adjustment of the off-balance-sheet shadow banking scale. This study also finds that in terms of on-balance sheet business, heighten MPU decreases the scale of bank credit and tightens loan approval criteria, in terms of off-balance sheet business, heighten MPU decreases the scale of shadow banking, thereby leading to a lower dynamic adjustment of firm’s capital structure. JEL classification C13, C36, E50, G21

Spillover effects of policy uncertainty on the foreign exchange rate: Evidence from selected developed and developing countries

Following the Great Depression of the 1930s, a number of prominent economists believe that the global financial crisis that erupted in 2008 from the American financial market played a significant role in changing the path of global economic progress and intensifying various uncertainties in various market-related activities and processes. Therefore, our research has attempted to quantify how the U.S.‘s economic and monetary policy uncertainty affects the dollar's exchange with its 12 major trading partners, both from developed and developing countries. As part of our analysis, we also factored out the potential impact of the recent global financial crisis—2008. We applied the MM-QR panel conditional quantile regression of Machado and Silva (2019) to the monetary model for exchange rate determination with data from 2000:M1 to 2017:M2. Even though the global financial crisis is under control, the estimated results of the MM-QR panel conditional quantile regression have revealed that the developed countries' economic policy uncertainty, not the U.S.'s economic policy uncertainty, has caused their currencies to depreciate against the U.S. dollar. But the uncertainty of U.S. economic policy has had an asymmetric effect on the exchange rates of developing countries against the U.S. dollar before and after the global financial crisis. Moreover, the U.S.‘s monetary policy uncertainty has depreciated both developed and developing countries' currencies against the U.S. dollar, both with and without control of the global financial crisis. The global financial crisis has also depreciated developing countries' currencies while it has appreciated developed countries' currencies against the U.S. dollar. As a result, this study concludes that whether in developed or developing countries, economic and monetary policy uncertainty has a significant impact on the nominal exchange rate.

Monetary policy uncertainty and stock market volatility

Monetary policy uncertainty and stock market volatility

Monetary Policy Uncertainty in Mexico: An Unsupervised Approach

Monetary Policy Uncertainty in Mexico: An Unsupervised Approach

The Term Structure of Monetary Policy Uncertainty

The Term Structure of Monetary Policy Uncertainty

The Role of Monetary Policy Uncertainty in Transmitting Monetary Policy Shocks

The Role of Monetary Policy Uncertainty in Transmitting Monetary Policy Shocks

The Role of Monetary Policy Uncertainty in Corporate Decisions

The paper emphasizes the role of monetary policy uncertainty in understanding the common dynamics in corporate behavior. Building on common statistical properties of the corporate events, we extract the common pattern (factor) and the common variance (volatility) from five corporate event waves. Using the extracted common factor and the common volatility, this study examines the effect of monetary policy uncertainty on corporate decisions. We hypothesize and explore this explanation of how commonalities between the corporate event waves are formed. The Fed’s actions can result in higher monetary policy uncertainty, which can increase the uncertainty about the outcomes of the major firm activities. The findings from the econometric analyses suggest that monetary policy uncertainty has a significant influence on the dynamics of corporate event waves.

Monetary policy uncertainty and stock returns in G7 and BRICS countries: A quantile-on-quantile approach

Using a quantile-on-quantile (QQ) approach, this study examines the heterogeneous and asymmetric effects of monetary policy uncertainty (MPU) on stock returns in Group of Seven (G7) countries and the BRICS countries. An overall negative effect of MPU is observed on stock returns in most countries, especially in the area that combines higher quantiles of MPU with lower quantiles of stock market. The results show that higher uncertainty decreases stock returns when the stock market suffers a crash. A positive market response to MPU shocks can also be found in the lower quantiles of MPU, suggesting that uncertainty can boost stock performance as well. Finally, this study shows that the market responses to MPU shocks in the G7 countries seem more volatile than in the BRICS countries. In sum, this study reveals the response of stock market at different quantiles to different degrees of monetary policy uncertainty, presenting a complete and precise picture of the overall inter-dependence between stock returns and MPU.

Monetary policy uncertainty and firm risk-taking

This paper analyzes the impact of monetary policy uncertainty (MPU) on firm risk-taking. We introduce a model to explore the investment behavior of a firm when greater monetary policy uncertainty occurs. The model predicts that, to limit risk exposure, a firm tends to lower its capital stock and thereby reduce its risk-taking. Utilizing the firm-level data from China over the period of 2000–2019, we show that MPU can significantly reduce corporate risk-taking. Moreover, we find that firms with financing constraints become risk averse when faced with MPU shocks. This paper sheds light on both theoretical basis and practical reference for firms to make better decisions on high-risk projects.