Conventional and unconventional monetary policy reaction to uncertainty in advanced economies : evidence from quantile regressions

Abstract

This paper investigates how the Federal Reserve (Fed) and the Bank of England, Bank of Japan and the European Central Bank reacted in the aftermath of the financial crisis by making use of both conditional and unconditional interest rate quantiles regressions and data on shadow short rate of interest and a measure of uncertainty. Firstly, the unconditional quantile regression offers some support for increased reaction by the Fed as the ZLB is approached. Secondly, the decreased reaction of the Fed and other monetary policy makers towards uncertainty particularly at lower conditional quantiles of interest rates lends support to expansionary mechanism in place during this time. Hence uncertainty is key to policy reaction, and more so during episodes of crisis.