Long-Run Economic Uncertainty
55 Pages Posted: 14 Oct 2018 Last revised: 24 Nov 2018
Date Written: November 17, 2018
Higher levels of long-run economic uncertainty are shown to predict larger risk premia as well as lower inflation rates, lower consumption growth and lower output growth over business-cycle to generational horizons. When seen through an asset pricing lens, the relation between long-run uncertainty and future inflation rates is a necessary by-product of three conditions: the (near) orthogonality of long-run uncertainty with respect to the dividend-to-price ratio, the ability of long-run uncertainty to strongly predict future risk premia, and its inability to predict nominal cash flows and real interest rates. A general class of equilibrium models with price rigidities is used to provide an economic channel.
Keywords: financial uncertainty, policy uncertainty, macro uncertainty, the long run, the real economy
JEL Classification: C22, E32, E44, G12, G17
Suggested Citation: Suggested Citation