Uncertainty and monetary policy in the US: A journey into nonlinear territory

This paper estimates a nonlinear vector autoregression (VAR) model to assess whether the real effects of monetary policy shocks depend on the level of uncertainty. Crucially, uncertainty is modeled endogenously in the VAR, thus allowing to take account of two unexplored channels of monetary policy transmission working through uncertainty direct reaction and uncertainty mean reversion. We find that monetary policy shocks are about 50-75% more powerful during tranquil times than during firm- and macro-level uncertain times. Failing to account for endogenous uncertainty would bias responses and imply twice more effective monetary policy during tranquil times, mainly because of the non-consideration of uncertainty mean reversion.