Research project: The Impact of Uncertainty on Monetary Transmission - Evidence from the US

This paper investigates the nonlinear interaction of the monetary transmission mechanism and economic uncertainty in the United States. I employ a Threshold VAR model with two states dependent on the level of uncertainty, and identify regime specific shocks using sign-restrictions. Results suggest that the short run contraction induced by the policy shock is larger when uncertainty is high, however, in such times, its impact dissipates more quickly. Comparatively in low uncertainty times, the contraction is smaller with policymakers having a smoother control over the path the economy takes. The short-run larger impact can be leveraged to reduce inflation in a more cost-effective way, however the uncerlying cause of uncertainty needs to be carefully considered.