Monetary Policy Effects on Firms’ Uncertainty

Gabriela López-Noria and Mathieu Pedemonte

No 14223, IDB Publications (Working Papers) from Inter-American Development Bank

Abstract: We study how monetary policy affects inflation uncertainty. Using a survey of Mexican firms and exploiting quasi-random variation in the response date, we estimate the effect of a monetary policy decision and surprise on firms perceived inflation uncertainty. We find that a one percentage point contractionary monetary policy reduces inflation uncertainty by 0.02 percentage points. We explore how this result is affected by levels of higher and lower aggregate uncertainty. We find that monetary policy tightening is twice as effective in reducing inflation uncertainty in periods of higher economic uncertainty, such as trade uncertainty. Our findings highlight the role of monetary policy in reducing inflation uncertainty. We discuss that in periods of uncertainty, monetary authorities face a trade-off between stimulating the economy and increasing uncertainty about the inflation outlook.

Keywords: survey data; inflation uncertainty; firms expectations (search for similar items in EconPapers)
JEL-codes: D80 D84 E31 E52 (search for similar items in EconPapers)
Date: 2025-07
New Economics Papers: this item is included in nep-cba and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:idb:brikps:14223

DOI: 10.18235/0013615

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