Research

Do inflation expectations react to changes in the volatility of monetary policy? Yes, but only until the global financial crisis. This paper investigates whether increasing the dispersion of monetary policy shocks, which is interpreted as elevated uncertainty surrounding monetary policy, affects the inflation expectation formation process. Based on U.S. data since the 1980 and a stochastic volatility-in-mean structural VAR model we find that monetary policy uncertainty suppresses both inflation expectations and inflation on average. However, after the Great Recession this link has disappeared, even when controlling for the Zero Lower Bound.

In this article we address the question of how strongly bank lending rates and credit volumes co-move across the euro area. Following the breakdown in the interest rate pass-through across the euro area, we aim to disentangle the relative importance of country-specific and common components in explaining the variance of the macro and financial variables by using a time-varying two-level dynamic factor model. Our results show that a high share is explained by the common component. However, we find a persistent decline in the importance of the common factor in the bank lending rates, indicating the presence of financial fragmentation. Furthermore, we find persistent heterogeneity across member states, specifically those hit hard by the sovereign-debt crisis.

By exploiting the stochastic volatility in oil production, we identify a novel source of instability in the global oil market: oil supply uncertainty. Our measure provides additional insights to standard measures in the literature, such as the geopolitical risk index and oil supply surprises. In particular, we demonstrate that unexpected increases in oil supply uncertainty lead to higher real oil prices and a drop in inventories. As such, our mechanism works through the speculative component in the global oil market, resembling the effects of a shortfall in oil supply. However, in contrast with a negative oil supply shock, heightened oil supply uncertainty yields a highly transitory decline in oil production.