Inflation Uncertainty and Endogenous Planning Horizons

Christopher Gust, Edward Herbst and David Lopez-Salido

Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We develop a finite-horizon planning model in which firms choose how far ahead to plan when setting prices. Planning further ahead improves a firm's pricing decision but requires cognitive effort. We derive analytical solutions for a firm's chosen planning horizon and show that large and persistent aggregate demand or supply disturbances induce firms to plan further ahead, making inflation more sensitive to shocks and generating endogenous movements in inflation uncertainty. Quantitatively, we show that the model matches the positive relationship between the size of inflation forecast revisions and inflation uncertainty observed in the data.

Keywords: inflation uncertainty; finite-horizon planning; inflation expectations (search for similar items in EconPapers)
Pages: 47 p.
Date: 2026-08-06
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:103617

DOI: 10.17016/FEDS.2026.055

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