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Aggregate Risk or Aggregate Uncertainty? Evidence from UK Households

Claudio Michelacci and Luigi Paciello ()
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Claudio Michelacci: EIEF and CEPR

No 2006, EIEF Working Papers Series from Einaudi Institute for Economics and Finance (EIEF)

Abstract: Using the Bank of England Inflation Attitudes Survey we find that households with preferences for higher inflation and higher interest rates have lower expected inflation. The wedge is mildly correlated with existing measures of uncertainty and increases after major economic events such as the failure of Lehman Brothers or the Brexit referendum. We interpret the wedge as due to Knightian uncertainty about future monetary policy and the underlying economic environment. If households had treated uncertainty as measurable risk, consumption and output would have been around 1 percent higher both during the Great Recession and in recent years.

Pages: 53 pages
Date: 2020, Revised 2020-04
New Economics Papers: this item is included in nep-eec and nep-rmg
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