Uncertainty Shocks and Policymakers’ Behavior : Evidence from the Subprime Crisis Era

The subprime crisis produced bizarre movements in real and financial aggregates. In particular, the presence of an unusual relationship between quantitative easing policies and credit market conditions led to an unprecedented drop in the real economic activity. In a Brainard (1967)'s parameter uncertainty framework, we investigate the potential effects of rare events in the U.S. money and credit markets on policymakers' behavior. We find that the presence of extraordinary money and credit market conditions exacerbates the policymakers' cautiousness-aggressiveness trade-off. Model's results suggest that an unusual money-credit relationship could offset the potential benefits of an aggressive policy. We conclude by arguing that a “double” dose of policy (i) may be inadequate both for firms and households and (ii) provides benefits to commercial banks