Unexpected Effects: Uncertainty, Unemployment, and Inflation
Lukas Freund and
No 14690, CEPR Discussion Papers from C.E.P.R. Discussion Papers
This paper studies the role of uncertainty in a search-and-matching framework with risk-averse households. A mean-preserving spread to future productivity contracts current economic activity even in the absence of nominal rigidities, although the effect is reinforced by the presence of the latter. That is, uncertainty shocks carry both contractionary demand- and supply effects. The reason is that a more uncertain future increases the precautionary behavior of households, which reduces interest rates and contracts demand. At the same time, as future asset prices becomes more volatile and positively covary with aggregate consumption, households demand a larger risk premium, which puts negative pressure on current asset values and thereby contracts supply. Thus, in comparison to a pure negative demand shock, an uncertainty shock puts less deflationary pressure on the economy and, as a result, renders a flatter Phillips curve.
Keywords: inflation; search frictions; uncertainty; unemployment (search for similar items in EconPapers)
JEL-codes: E21 E32 J64 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-lab, nep-mac and nep-upt
References: Add references at CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at firstname.lastname@example.org
Working Paper: Unexpected Effects: Uncertainty, Unemployment, and Inflation (2020)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:14690
Ordering information: This working paper can be ordered from
http://www.cepr.org/ ... rs/dp.php?dpno=14690
Access Statistics for this paper
More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().