XXV Edition

1-2 December 2016"

Subjective Interest Rate Uncertainty and the Macroeconomy: a Cross-Country Analysis

Mouabbi Sarah, Bank of France
Klodiana Istrefi, Bank of France

We ask whether uncertainty about interest rates is important for economic activity. Causal effects of uncertainty on the economy are examined through the lens of a small VAR where the assumption that uncertainty and real activity cannot contemporaneously react to each other is indeed in line with the data. Our measure of uncertainty stems from professional forecasts of short- and long-term interest rates and accounts for both disagreement among forecasters and the perceived variability of future aggregate shocks. Studying a panel of ten countries we find that subjective interest rate uncertainty has large, negative and persistent effects on the economy.

Area: Monetary Policy and Central Banking

Keywords: interest rates, subjective uncertainty, surveys of professional forecasters, macroeconomic fluctuations, structural VAR

Paper file

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