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Economic policy uncertainty and household inflation uncertainty

Carola Binder ()

The B.E. Journal of Macroeconomics, 2017, vol. 17, issue 2, 20

Abstract: How does uncertainty about economic policy translate into uncertainty about macroeconomic outcomes, in particular inflation? New measures of consumer inflation uncertainty are compared to the economic and monetary policy uncertainty indices of [Baker, S., N. Bloom, and S. Davis. 2016. “Measuring Economic Policy Uncertainty.” Quarterly Journal of Economics.]. Economic policy uncertainty is more strongly correlated with uncertainty about shorter-run inflation than with uncertainty about longer-run inflation, while monetary policy uncertainty is more correlated with uncertainty about longer-run than shorter-run inflation. Both economic and monetary policy uncertainty Granger cause inflation uncertainty. Consumer inflation uncertainty can be computed for demographic subgroups. High income and high education consumers have the lowest inflation uncertainty, but their short-run inflation uncertainty is most strongly correlated with policy uncertainty. The long-run inflation uncertainty of the top income quintile is less correlated with policy uncertainty, possibly reflecting stronger anchoring of inflation expectations for this group. Policy uncertainty appears to reflect the expectations of consumers more than professional forecasters or financial markets.

Keywords: consumers; economic policy uncertainty; expectations; household surveys; inflation uncertainty (search for similar items in EconPapers)
JEL-codes: D83 D84 E31 E52 E58 (search for similar items in EconPapers)
Date: 2017
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DOI: 10.1515/bejm-2016-0048

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