Uncertainty and the macroeconomic effects of monetary policy in the euro area

Abstract

This dissertation examines how uncertainty alters the transmission of monetary policy shocks to inflation and economic activity in the euro area. Using high-frequency changes in overnight index swap rates around European Central Bank announcements, the analysis estimates impulse responses under varying levels of financial market uncertainty, measured by the VSTOXX index. The results show that uncertainty amplifies the disinflationary effects of monetary policy tightening, particularly in the short to medium term. Amplification is most persistent for the part of the shock related to forward guidance and larger for the part of the shock related to stance. Regarding economic activity, the findings suggest that a policy tightening leads to a significantly larger drop in industrial production during times of heightened uncertainty. To see whether these responses are symmetric, monetary shocks are split into contractionary and expansionary shocks. Inflation responds asymmetrically: policy tightening has a stronger effect when uncertainty is high, while not significantly altering the impact of expansionary shocks. For industrial production, uncertainty amplifies both tightening and easing shocks, making the response symmetric. These findings provide new evidence on the importance of central banks to consider prevailing uncertainty when making monetary policy decisions.

Date of Award	13 Oct 2025
Original language	English
Awarding Institution	Universidade Católica Portuguesa
Supervisor	Carla Sofia Soares (Supervisor)