Journal
JOURNAL OF MONETARY ECONOMICS
Volume 114, Issue -, Pages 262-282Publisher
ELSEVIER
DOI: 10.1016/j.jmoneco.2019.03.011
Keywords
DSGE; Non-Linear SVAR; New keynesian; Search and matching frictions; Epstein-Zin preferences; Stochastic volatility
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We develop a VAR that allows the estimation of the impact of monetary policy shocks on volatility. Estimates for the US suggest that an increase in the policy rate by 1% is associated with a rise in unemployment and inflation volatility of about 15%. Using a New Keynesian model, with search and matching labour frictions and Epstein-Zin preferences we show that these volatility effects are driven by the coexistence of agents' fears of unemployment and concerns about the (in) ability of the monetary authority to reverse deviations from the policy rule with the impact magnified by the agents' preferences. (c) 2019 Elsevier B.V. All rights reserved.
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