Inflation expectation uncertainty in a New Keynesian framework

Angela Fuest and Torsten Schmidt

No 867, Ruhr Economic Papers from RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen

Abstract: For monetary policy guiding inflation expectations provides an instrument to achieve price stability. However, expectation uncertainty may undermine monetary policy's ability to stabilise the economy. This study examines the effects of inflation expectation uncertainty on inflation, inflation expectations and the output gap by means of a structural VAR with stochastic volatility in mean. Inflation expectation uncertainty negatively affects the inflation rate and the output gap, without having a distinct effect on the level of expectations. This result is replicable with a model in which uncertainty is approximated by a cross-sectional survey measure. Furthermore, simulating an uncertainty shock in a DSGE model shows that the demand channel dominates the supply channel of an inflation expectation uncertainty shock.

Keywords: uncertainty; inflation expectations; Phillips curve; New Keynesian model (search for similar items in EconPapers)
JEL-codes: C32 C63 E31 E52 (search for similar items in EconPapers)
Date: 2020
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac, nep-mon and nep-ore
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:rwirep:867

DOI: 10.4419/96973004

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