The Macroeconomic Effects of Inflation Uncertainty

59 Pages Posted: 13 Mar 2023 Last revised: 12 May 2023

See all articles by Norbert Metiu

Norbert Metiu

Deutsche Bundesbank

Esteban Prieto

Deutsche Bundesbank - Economic Research Centre

Date Written: March 7, 2023

Abstract

The uncertainty of U.S. core inflation, measured by the stochastic volatility of forecast errors, has soared to a level not seen in nearly five decades since the COVID-19 pandemic hit the global economy. Prices, consumption, and production increase after a positive shock to core inflation uncertainty in a vector autoregression. Endogenous changes in household inflation expectations help to understand the transmission mechanism through which an inflation uncertainty shock generates positive demand effects. Households expect significantly higher inflation when confronted with a surprise increase in the uncertainty of core consumer prices. In turn, they consume more, which boosts aggregate demand.

Keywords: Household Expectations, Inflation, Uncertainty, Stochastic Volatility

JEL Classification: E31, E32

Suggested Citation

Metiu, Norbert and Prieto, Esteban, The Macroeconomic Effects of Inflation Uncertainty (March 7, 2023). Available at SSRN: https://ssrn.com/abstract=4381311 or http://dx.doi.org/10.2139/ssrn.4381311

Norbert Metiu (Contact Author)

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Esteban Prieto

Deutsche Bundesbank - Economic Research Centre ( email )

Wilhelm-Epstein-Strasse 14
Frankfurt/Main D-60431
Germany

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