Ruhr Economic Papers

Ruhr Economic Papers #899

Monetary Policy Uncertainty and Inflation Expectations

by Gabriel Arce-Alfaro and Boris Blagov

RGS, UDE, RWI, 03/2021, 32 S./p., 8 Euro, ISBN 978-3-96973-039-3 DOI: 10.4419/96973039



Do inflation expectations react to changes in the volatility of monetary policy? Yes, but only until the global financial crisis. This paper investigates whether increasing the dispersion of monetary policy shocks, which is interpreted as elevated uncertainty surrounding monetary policy, affects the inflation expectation formation process. Based on U.S. data since the 1980s and a stochastic volatility-in-mean structural VAR model we find that monetary policy uncertainty reduces both inflation expectations and inflation. However, after the Great Recession this link has disappeared, even when controlling for the Zero Lower Bound.

JEL-Classification: C11, C32, E52

Keywords: Monetary policy uncertainty; inflation expectations; SVAR volatility-in-mean; time-varying coefficients