The Impact of Unconventional Monetary Policy on Uncertainty: Evidence from the U.S. and the EMU

Phillip Jamaldeen & Alexis Jolivet

Student thesis: Master thesis


In response to the turmoil after the bankruptcy of Lehmann Brothers in 2008 and due to the events of the euro crisis in the subsequent years, market uncertainty skyrocketed. In this highly volatile economic environment, the Federal Reserve Bank (Fed) and the European Central Bank (ECB) implemented a variety of unconventional monetary policy instruments in order to stabilize the tumbling nancial system, restore the functioning of credit markets and to stimulate the depressed real economy. These policies comprised interest rate cuts close to the zero bound and large-scale asset purchase programs, whereas the choice of instruments and the timing di ered between the U.S. and the euro area. We address the question of how the monetary policies in the U.S. and the European Economic and Monetary Union (EMU) between 2007 and 2014 a ected stock market uncertainty. Similar to Bekaert et al. [2013], we use implied volatility indices in order to proxy for market uncertainty. The results of our structural vector autoregressive (SVAR) model indicate that monetary easing lowered uncertainty signi cantly in the medium-term future. However, the e ects die o in the long-run. These results hold for the unconventional policy of the Fed as well as the conventional and the non-standard policies of the ECB. However, the impulse responses of our SVAR models also indicate that the nonstandard monetary policy transmitted into the economy slower compared to the pre-crisis period. This phenomenon is also stated in Peersman [2011]. For the EMU we, moreover, nd substantial asymmetries in the monetary policy transmission. The crisis policy lowered uncertainty more e ectively in Germany than in France. This result might have interesting implications for European policy makers who have to deal with the negative externalities of the euro crisis. Checking for spillover e ects from the U.S. to the EMU, we show that expansionary monetary policy shocks from the Fed are expected to lower uncertainty in Germany and France signi cantly. This e ect is found to be relatively larger in the case of Germany. The OLS estimates of our event study provide further support for the hypothesis that monetary policy shocks e ectively lowered stock market uncertainty. To summarize, our empirical results indicate that the crisis policy within the U.S. and the EMU was e ective in reducing market uncertainty. One can conclude that the monetary policy played a key role for mitigating the negative externalities of the nancial crisis. Lowering uncertainty is expected to have positive e ects on economic growth and in ation (Bloom [2009]). Furthermore, it seems reasonable assume that the crisis policy of the Fed and the ECB was a major factor for restoring the functioning of credit markets and, thereby, also for assuring the e ctiveness of the monetary policy transmission mechanism.

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final Thesis
Publication date2015
Number of pages101