Responses to monetary policy uncertainty : an asymmetric analysis of money supply and demand

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Ongan, Serdar and Gocer, Ismet (2025) Responses to monetary policy uncertainty : an asymmetric analysis of money supply and demand. Studies in Economics and Finance, 42 (5). pp. 1096-1110. ISSN 1086-7376 (https://doi.org/10.1108/sef-03-2025-0223)

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Abstract

Purpose: This study aims to examine the symmetric and asymmetric effects of uncertainties in US monetary policy on money demand between 2000: M1 and 2025: M5. Design/methodology/approach: To this end, this study explores and uses the recently developed monetary policy uncertainty (MPU) index, applying both linear and nonlinear autoregressive distributed lag (ARDL) models to the USA. The linear model could not find a significant effect of MPU on money demand (M2). Findings: The linear model could not find a significant effect of MPU on M2. However, empirical findings of the nonlinear ARDL indicate that uncertainties in monetary policy have essential impacts on M2. While rises in the MPU index decrease the demand for money, falls in the index increase in the long run. This can be interpreted as meaning that rising uncertainty in the MPU increases uncertainty about future interest rates, inflation and economic growth expectations, and individuals may become more cautious about spending or investing. However, when uncertainty decreases, Americans tend to increase their demand for money. Originality/value: Using the MPU index − rather than broader uncertainty indicators such as the EPU − provides a more focused perspective on monetary dynamics. Crucially, the findings offer forward-looking insights into how Americans may adjust their money-holding behavior in response to potential increases in MPU driven by evolving Federal Reserve policies under the current US administration’s 2025 high-tariff economic agenda. This enhances the study’s policy relevance for anticipating behavioral responses to future uncertainty.

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