Economic policy uncertainty and unconventional monetary policy

Abstract

In this study, the US daily economic policy uncertainty (EPU) index is employed to examine how EPU changes because of the implementation of and exit from the unconventional monetary policy adopted by the Federal Open Market Committee (FOMC). The analysis suggests that forward guidance lowers the volatility of EPU. Moreover, the EPU level decreases during the tapering period of quantitative easing. This may be attributable to the unequivocal expected lifting of the zero interest rate policy. In contrast to these findings favoring the FOMC’s successful communication, it is found that time-contingent forward guidance increases EPU.