Macroeconomic Shocks in the Fog: The Role of Endogenous Uncertainty

Anastasiia Antonova, Mykhailo Matvieiev and Céline Poilly ()
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Anastasiia Antonova: Bank of Canada
Mykhailo Matvieiev: Bank of Canada
Céline Poilly: Aix-Marseille Univ., CNRS, AMSE, Marseille, France, https://www.amse-aixmarseille.fr/en/members/poilly

No 2538, AMSE Working Papers from Aix-Marseille School of Economics, France

Abstract: Recessions are often accompanied by heightened uncertainty. We look at the effect of endogenous uncertainty on aggregate demand and its implications for monetary policy. We enrich a non-linear New-Keynesian model with imperfect noisy information, where the precision of signals is pro-cyclical. The endogenous uncertainty channel amplifies aggregate demand effects through precautionary saving. Ultimately, it can even reverse sign of the output-gap response to a supply shock. Monetary policy can eliminate both pricing and information-induced inefficiencies by closing the output gap. Based on U.S. household income forecast errors data, we estimate a sizable and significant degree of pro-cyclicality in the precision of signals.

Keywords: Endogenous uncertainty; precautionary saving; aggregate demand; imperfect information (search for similar items in EconPapers)
JEL-codes: D81 D83 E21 E32 E40 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2025-12
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Persistent link: https://EconPapers.repec.org/RePEc:aim:wpaimx:2538

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