The relationship between monetary policy and uncertainty in advanced economies: evidence from time- and frequency-domains

Abstract

In this work we offer new insight into the relationship between interest rates and uncertainty for several advanced economies (Canada, Euro Area, Japan, UK, US) for the period 2003?2018. For this purpose, we utilize wavelets, which allow us to analyze how the relationship changes over time and across different frequencies, and to make inference about causality. We also use the daily shadow interest rate measure of Krippner (2012), (2013) to capture the stance of monetary policy making at the zero lower bound, and the uncertainty measure by Scotti (2016) to measure uncertainty related to the real economy. Our findings suggest that there is significant co-movement over time and across different frequencies in all the countries we analyze. Corresponding to the similar, yet different conduct of monetary policy, we also find that the relationship exhibits different characteristics and causality in all the economies we analyze, implying that one must be careful not to draw generalized conclusions. © 2020