PublicFinanceDuring the last few decades, central banks across the globe came to recognize the potentially valuable role that transparency can play in stabilizing the economy. For example, the Federal Reserve in the US started releasing a statement describing policy actions regarding the effective policy interest rate. Further, forward guidance, an explicit communication from the Federal Reserve about the likely future course of monetary policy, has been one of the important tools of unconventional monetary policy in the post-financial crisis zero lower bound (ZLB) period of policymaking. It has been established that interest rate predictability has improved with increasing central bank transparency and better communication strategies, as the public could form more accurate expectations about the current and future path of interest rates (as a function of economic conditions). This, in turn, is thought to translate into lower levels of monetary policy uncertainty, which typically has an expansionary effect as it encourages investment and spending. Motivated by the distinct link of interest rate predictability and monetary policy uncertainty, the authors rely on the accuracy of expectations of the policy rate to characterize monetary policy uncertainty. As a basis for their analysis, the authors employ federal funds rate forecast errors for several horizons implied by the Blue Chip Financial Forecasts (BCFF). Results show that positive and negative forecast errors occur in clusters and are tightly linked to the behavior of the policy rate. Namely, negative (positive) forecast errors dominate during the episodes of monetary easing (tightening). Moreover, the conditional (historical) forecast error distributions become tighter over time indicating that the forecast error dispersions decreased over time. Strikingly, this decline is nearly entirely driven by the fact that the right tail (associated with positive forecast errors and tightening episodes) shortens over time, while the left tail (associated with negative forecast errors and easing episodes) shows no apparent downward trend and exhibits mainly cyclical variations. We attribute this behavior to increasingly better-communicated policy actions from the Federal Reserve during monetary tightenings. To measure monetary policy uncertainty, the authors summarize the asymmetry in the forecast error evolution using a metric that quantifies uncertainty in terms of probabilities and, therefore, allows the authors to take the asymmetric tail behavior into account. This metric of monetary policy uncertainty combines both left- and right-tail behaviors of forecast errors to a single joint measure. This simplifies the analysis of the economic effects of monetary policy uncertainty. Since the uncertainty measure is based on the forecast errors, it inherits all the documented asymmetries and time-varying properties associated with the forecast errors. Lastly, this paper investigates whether there is non-linear propagation of monetary policy uncertainty shocks and whether it matters for macroeconomic dynamics. The authors find recessionary effects that are stronger in easing relative to tightening. After purging our measure for macroeconomic uncertainty, effects generally get dampened, but non-linearities remain
