Essays on macroeconomic uncertainty, monetary policy and financial development in the G7 and BRICS countries

Abstract

Recent literature on macroeconomic uncertainty emphasizes its disruptive effects on monetary policy effectiveness and financial development, yet much of the existing work focuses on aggregate linear effects and rarely accounts for regime dependence or threshold dynamics. In both advanced and emerging economies, uncertainty alters the transmission of policy shocks, amplifies volatility, and undermines financial stability. However, the specific thresholds and asymmetric channels through which uncertainty influences monetary policy and financial development remain underexplored. This thesis addresses these gaps by systematically investigating the threshold and nonlinear effects of macroeconomic uncertainty in G7 and BRICS countries across three self-contained essays.

The first essay examines the threshold effects of macroeconomic uncertainty on monetary policy in G7 countries using quarterly data from 2000 to 2024 and a Structural Vector Autoregression (SVAR) framework. The results reveal a distinct uncertainty threshold separating low- and high-uncertainty regimes. During high-uncertainty periods, monetary policy effectiveness is significantly reduced, with shocks to uncertainty producing amplified effects on key macroeconomic variables. This highlights a policy dilemma for central banks, which must navigate amplified trade-offs under unstable market conditions.

The second essay investigates the threshold effects of macroeconomic uncertainty on monetary policy in BRICS countries using annual data from 2000 to 2022 and a SVAR approach. The findings confirm the existence of two uncertainty regimes: low and high. While interest rate rules appear effective under low-uncertainty conditions, they break down during high-uncertainty regimes, suggesting that conventional monetary policy loses traction when uncertainty escalates. The results also show that macroeconomic uncertainty shocks exert disproportionately stronger effects on core macroeconomic variables during high-uncertainty periods. These findings highlight the critical importance of adopting flexible policy responses tailored to prevailing uncertainty conditions in emerging economies.

The third essay investigates the asymmetric effects of macroeconomic uncertainty on financial development in G7 and BRICS countries from 1980 to 2024. Using a Markov-Switching regression framework, the analysis employs the World Uncertainty Index (WUI) and exchange rate volatility (ERV) as proxies for uncertainty, alongside the policy interest rate to capture the monetary transmission channel. The results reveal that the effects of uncertainty on financial development are highly regime dependent. In particular, macroeconomic uncertainty exerts more destabilising effects under high-uncertainty regimes, while monetary policy amplifies these effects. Wald tests of asymmetry confirm that the responses of financial development differ significantly across regimes, suggesting threshold-like dynamics in how uncertainty shocks propagate through the financial system.

Interconnectedly, the three essays contribute to the literature by demonstrating that the effects of macroeconomic uncertainty on monetary policy and financial development are nonlinear and, regime-dependent. The overall findings emphasize the need for adaptive, regime-sensitive monetary and financial policy frameworks that can effectively mitigate the risks of uncertainty shocks. These insights are particularly valuable for policymakers seeking to enhance financial stability and resilience in both advanced and emerging economies.