Macroeconomic Shocks in the Fog: The Role of Endogenous Uncertainty

Anastasiia Antonova, Mykhailo Matvieiev and Céline Poilly
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Anastasiia Antonova: Bank of Canada
Mykhailo Matvieiev: Bank of Canada
Céline Poilly: AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique

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Abstract: Recessions are often accompanied by heightened uncertainty. We look at the effect of endogenous uncertainty on aggregate demand and its implications for monetary policy. We enrich a non-linear New-Keynesian model with imperfect noisy information, where the precision of signals is pro-cyclical. The endogenous uncertainty channel amplifies aggregate demand effects through precautionary saving. Ultimately, it can even reverse sign of the output-gap response to a supply shock. Monetary policy can eliminate both pricing and information-induced inefficiencies by closing the output gap. Based on U.S. household income forecast errors data, we estimate a sizable and significant degree of pro-cyclicality in the precision of signals.

Keywords: precautionary saving; aggregate demand; imperfect information; Endogenous uncertainty (search for similar items in EconPapers)
Date: 2025-12-18
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