European Central Bank: Risk, Uncertainty And Monetary Policy

A popular indicator of risk aversion in financial markets, the VIX index, shows strong co-movements with measures of the monetary policy stance. Figure 1 considers the cross-correlogram between the real interest rate (the Fed funds rate minus inflation), a measure of the monetary policy stance, and the logarithm of end-of-month readings of the VIX index. The VIX index essentially measures the “risk-neutral” expected stock market variance for the US S&P500 index. The correlogram reveals a very

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