Monetary Policy Uncertainty: does it justify requiring the Fed to follow a Taylor rule?
Editor’s note: This post is part of a series showcasing Barcelona GSE master projects by students in the Class of 2015. The project is a required component of every master program.
Jacques Alcabes, Ángelo Gutiérrez, Patrick Mayer, and Hugo Kaminski
In 2014 the “Federal Reserve Accountability and Transparency Act” (FRATA) was introduced in the U.S. congress requiring the Fed to adopt a rules-based policy. Supporters of this act argue that uncertainty about economic policy is one of the main explanations for the slow economic recovery witnessed by the U.S. since the 2008 financial crisis. In this article we investigate the effects of monetary policy as a specific source of policy uncertainty and propose some novel measures to estimate the effect and magnitude of monetary policy uncertainty on economic activity. We find that, while the effects of monetary policy uncertainty are statistically significant, it is not a large contributor to economic fluctuations.