Supply Shocks in the Fog: The Role of Endogenous Uncertainty

Anastasiia Antonova, Mykhailo Matvieiev and Poilly, Céline

No 21197, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Recessions are often accompanied by heightened uncertainty. We build an imperfect-information New Keynesian model in which procyclical information quality generates endogenous countercyclical uncertainty, and the nonlinear structure allows for a precautionary saving motive. We show theoretically that endogenous uncertainty operates entirely through aggregate demand. For negative supply shocks, the induced rise in uncertainty can depress demand enough to dominate the shock's inflationary force, turning the shock deflationary. Monetary policy can fully eliminate the adverse effect of endogenous uncertainty by stabilizing the output gap. We quantify the endogenous uncertainty channel in the US data and find it to be strong enough to generate deflation in response to negative supply shocks.

Keywords: Endogenous uncertainty; Precautionary saving; Aggregate demand; Imperfect information (search for similar items in EconPapers)
JEL-codes: D81 D83 E21 E32 E52 (search for similar items in EconPapers)
Date: 2026-02
References: Add references at CitEc
Citations:

Downloads: (external link)
https://cepr.org/publications/DP21197 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:21197

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP21197

Access Statistics for this paper

More papers in CEPR Discussion Papers from Centre for Economic Policy Research 33 Great Sutton Street, London EC1V 0DX, UK.
Bibliographic data for series maintained by CEPR ().