Working Paper Series no. 619: Subjective Interest Rate Uncertainty and the Macroeconomy: A Cross-country Analysis

Abstract:

We ask whether uncertainty about interest rates is important for economic activity. Effects of interest rate uncertainty on the economy are examined through the lens of a small VAR where the assumption that uncertainty can affect real activity contemporaneously but not  vice versa 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 countries we find that subjective interest rate uncertainty has large, negative and persistent effects on the economy.

Klodiana Istrefi and Sarah Mouabbi
January 2017

JEL codes: C32, E43, E47, F44, F47.

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