Uncertainty Shocks and Inflation: The Role of Credibility and Expectation Anchoring

Joscha Beckmann and Robert Czudaj

MPRA Paper from University Library of Munich, Germany

Abstract: This paper focuses on the uncertainty effect on consumer price inflation based on a panel of 82 advanced, emerging, and developing economies studied over a sample period running from 1995 to 2022. In contrast to the previous literature, we particularly control for the role of monetary policy credibility by considering the monetary control classification of Cobham (2021) and by measuring the degree of anchoring of inflation expectations. We argue that the interpretation of uncertainty as a negative demand shock is appealing from a theoretical perspective but is unlikely to reflect uncertainty dynamics for countries with high inflation and/or low monetary policy credibility. We find that higher uncertainty boosts inflation. However, this effect is significantly reduced (or even eliminated) by both a strong degree of monetary control and a strong anchoring of inflation expectations, illustrating that both factors are of key importance for the propagation of uncertainty shocks.

Keywords: Anchoring; Inflation expectations; Monetary policy; Survey data; Uncertainty (search for similar items in EconPapers)
JEL-codes: E31 E52 E58 (search for similar items in EconPapers)
Date: 2024
New Economics Papers: this item is included in nep-ifn and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:119971

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