Supply Shocks in the Fog: The Role of Endogenous Uncertainty

Anastasiia Antonova, Mykhailo Matvieiev and Céline Poilly

Staff Working Papers from Bank of Canada

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: Models and tools; Economic models; Monetary policy; Inflation dynamics and pressures; Monetary policy framework and transmission (search for similar items in EconPapers)
JEL-codes: D81 D83 E21 E32 E52 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2026-04
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:26-12

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