Risk Management-Driven Policy Rate Gap

We employ real-time data available to the US monetary policy makers to estimate a
Taylor rule augmented with a measure of financial uncertainty over the period 1969-
2008. We find evidence in favor of a systematic response to financial uncertainty over
and above that to expected inflation, output gap, and output growth. However, this
evidence regards the Greenspan-Bernanke period only. Focusing on this period, the
"risk-management" approach is found to be responsible for monetary policy easings for
up to 75 basis points of the federal funds rate.