Economic Policy Uncertainty and Household Inflation Uncertainty
31 Pages Posted: 31 May 2016
Date Written: May 30, 2016
How does uncertainty about economic policy translate into uncertainty about macroeconomic outcomes, in particular inflation? New measures of consumer inflation uncertainty are compared to the economic and monetary policy uncertainty indices of Baker, Bloom, and Davis (2015). Economic policy uncertainty is most strongly correlated with uncertainty about short-run inflation, while monetary policy uncertainty is most correlated with uncertainty about long-run inflation. Both economic and monetary policy uncertainty Granger cause inflation uncertainty. Consumer inflation uncertainty can be computed for demographic subgroups. High income and high education consumers have the lowest inflation uncertainty, but their short-run inflation uncertainty is most strongly correlated with policy uncertainty. The long-run inflation uncertainty of the top income quintile is less correlated with policy uncertainty, possibly reflecting stronger anchoring of inflation expectations for this group. Policy uncertainty appears to reflect the expectations of consumers more than professional forecasters or financial markets. Inflation uncertainty in other countries increases with U.S. and same-country policy uncertainty.
Keywords: Inflation uncertainty, economic policy uncertainty, expectations, consumers, household surveys
JEL Classification: D83, D84, E31, E52, E58
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