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Monetary Policy Uncertainty in the United States and Investment Sentiment in Advanced Economies

  • Nahiyan Faisal Azad and Apostolos Serletis EMAIL logo
Published/Copyright: November 26, 2024
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Studies in Nonlinear Dynamics & Econometrics
From the journal Studies in Nonlinear Dynamics & Econometrics Volume 29 Issue 4

Abstract

How does uncertainty originating from the future path taken by monetary policy enacted by the Federal Reserve in the United States affect the business confidence in other advanced economies? Does US monetary policy uncertainty affect economic activity in the United States and in Canada, France, Germany, Italy, Japan, and the United Kingdom. Motivated to answer these questions, we use monthly data and a bivariate GARCH-in-Mean VAR model. We also use a multivariate structural VAR model and a different measure of US monetary policy uncertainty, achieving identification by a combination of short-run and long-run restrictions. Our evidence shows that US monetary policy uncertainty, irrespective of how it is measured, has negative effects on the business confidence and output in the advanced G7 economies.

Keywords: G7; monetary policy uncertainty; investor sentiment; GARCH-in-Mean VAR; structural VAR
JEL Classification: C32; D12; Q43; O57
Corresponding author: Apostolos Serletis, Department of Economics, University of Calgary, Calgary, Alberta T2N 1N4, Canada, E-mail: 

We would also like to thank two anonymous referees for comments that greatly improved the paper.

  1. Competing interests: We have no conflicts of interest.

  2. Data availability: Data will be available upon request.

  3. Research involving human participants and/or animals: The research is not involving human participants and/or animals.

Appendix A
Table A1:

Data sources.

Variable Source
Canada Output https://data.oecd.org/industry/industrial-production.htm
Consumer price index: all items https://fred.stlouisfed.org/series/CANCPIALLMINMEI
France Output https://data.oecd.org/industry/industrial-production.htm
Consumer price index: all items https://fred.stlouisfed.org/series/FRACPIALLMINMEI
Germany Output https://data.oecd.org/industry/industrial-production.htm
Consumer price index: all items https://fred.stlouisfed.org/series/DEUCPIALLMINMEI
Italy Output https://data.oecd.org/industry/industrial-production.htm
Consumer price index: all items https://fred.stlouisfed.org/series/ITACPIALLMINMEI
Japan Output https://data.oecd.org/industry/industrial-production.htm
Consumer price index: all items https://fred.stlouisfed.org/series/JPNCPIALLMINMEI
3-month or 90-day rates and yields: interbank rates for Japan, percent, monthly, not seasonally adjusted https://fred.stlouisfed.org/series/IR3TIB01JPM156N
United Kingdom Output https://data.oecd.org/industry/industrial-production.htm
Consumer price index: all items https://fred.stlouisfed.org/series/GBRCPIALLMINMEI
United States Output https://data.oecd.org/industry/industrial-production.htm
Consumer price index: all items https://fred.stlouisfed.org/series/CPALTT01USM661S
Investor sentiment Business confidence index (BCI) https://data.oecd.org/leadind/business-confidence-index-bci.htm#indicator-chart
Policy rate Central bank policy rates https://www.bis.org/statistics/cbpol.htm
Uncertainty indices Husted, Rogers and Sun (2020) monetary policy uncertainty (MPU) index for the United States https://www.policyuncertainty.com/monetary.html
Baker, Bloom, and Davis (2016) monetary policy uncertainty index (MPU) index for the United States https://www.policyuncertainty.com/monetary.html
Table A2:

Data description.

Series Transformation in baseline and alternative models Description
△lninv t 100 × [ln(inv t ) − ln(inv t−1)] Business confidence indicator growth rate
Δ i t * i t * − i t − 1 * First difference of U.S. policy rate
Δi t i t  − i t−1 First difference of domestic policy rate
△lny t 100 × [ln(y t ) − ln(y t−1)] Industrial production (real output) growth rate
π t 100 × [ln(cpi t ) − ln(cpi t−1)] Inflation rate

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Supplementary Material

This article contains supplementary material (https://doi.org/10.1515/snde-2023-0108).

Received: 2023-11-29
Accepted: 2024-09-06
Published Online: 2024-11-26

© 2024 Walter de Gruyter GmbH, Berlin/Boston

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https://doi.org/10.1515/snde-2023-0108
Keywords for this article
G7; monetary policy uncertainty; investor sentiment; GARCH-in-Mean VAR; structural VAR

Articles in the same Issue

  1. Frontmatter
  2. Interview
  3. From Model Misspecification to Multidimensional Welfare: A Conversation with Professor Esfandiar Maasoumi
  4. Research Articles
  5. A Test for Time-Varying Smooth Transition Conditional Covariance Models in Multivariate Time Series
  6. Quasi-Maximum Likelihood for Estimating Structural Models
  7. Monetary Policy Uncertainty in the United States and Investment Sentiment in Advanced Economies
  8. Inflation: Demand Pull or Cost Push? A Markov Switching Approach
  9. Divisia Monetary Aggregates for India
  10. Introducing sspaneltvp: A Code to Estimating State-Space Time-Varying Parameter Models in Panels. An Application to Okun’s Law
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