Monetary policy and oil volatility smirk

This paper investigates the transmission of U.S. monetary policy shocks to oil market dynamics, focusing on oil price uncertainty and tail risks. Using a structural VAR model, we reveal that tight monetary policy induces a sustained increase in oil market uncertainty while reducing left-tail risk, as hedgers exhibit diminished concern over extreme downside risks. In contrast, the impact on right-tail risk is statistically insignificant. Moreover, the effects of monetary policy shocks are asymmetric: while contractionary policies raise oil uncertainty and expansionary policies reduce it, tight monetary policies exert a stronger influence on left-tail risk, with pronounced disparities in the response of right-tail risk between tightening and loosening policies.