The Inflation Uncertainty Amplifier

Efrem Castelnuovo and Giovanni Pellegrino ()
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Giovanni Pellegrino: University of Padova and Aarhus University Author-Name: Laust L. Særkjær

No 321, "Marco Fanno" Working Papers from Dipartimento di Scienze Economiche "Marco Fanno"

Abstract: We study how uncertainty shocks affect the macroeconomy across the inflation cycle using a nonlinear stochastic volatility-in-mean VAR. When inflation is high, uncertainty shocks raise inflation and depress real activity more sharply. A nonlinear New Keynesian model with second- moment shocks and trend inflation explains this via an "inflation-uncertainty amplifier": the interaction between high trend inflation and firms’ upward price bias magnifies the effects of uncertainty by increasing price dispersion. An aggressive policy response can replicate the allocation achieved under standard policy when trend inflation is low.

Keywords: : Uncertainty; trend inflation; nonlinear VAR model; new Keynesian model; monetary policy. (search for similar items in EconPapers)
Pages: 73 pages
New Economics Papers: this item is included in nep-dge and nep-mon
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Working Paper: The Inflation Uncertainty Amplifier (2025)
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Persistent link: https://EconPapers.repec.org/RePEc:pad:wpaper:0321

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