Risk Management-Driven Policy Rate Gap

Melbourne Institute Working Paper No. 10/18

Date: August 2018


Giovanni Caggiano
Efrem Castelnuovo
Gabriela Nodari


We employ real-time data available to the US monetary policy makers to estimate a Taylor rule augmented with a measure of financial uncertainty over the period 1969-2008. We find evidence in favor of a systematic response to financial uncertainty over and above that to expected inflation, output gap, and output growth. However, this evidence regards the Greenspan-Bernanke period only. Focusing on this period, the "risk-management" approach is found to be responsible for monetary policy easings for up to 75 basis points of the federal funds rate.

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