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Inflation and uncertainty in New Keynesian models: A note

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  • Pintér, Gábor

Abstract

This note studies the inflation–uncertainty relationship in a New Keynesian framework with Rotemberg pricing. Inflation in these models can be expressed as the discounted sum of current and expected future real marginal costs. The main point of this note is to highlight that real marginal costs in general equilibrium tend to be a convex function of output. This, ceteris paribus, makes higher uncertainty about future output increase current inflation, which can quantitatively off-set the deflationary effect of uncertainty via the precautionary savings channel (Basu and Bundick, 2017).

Suggested Citation

  • Pintér, Gábor, 2023. "Inflation and uncertainty in New Keynesian models: A note," Economics Letters, Elsevier, vol. 222(C).
    • Handle: RePEc:eee:ecolet:v:222:y:2023:i:c:s0165176522003913
    DOI: 10.1016/j.econlet.2022.110917
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    References listed on IDEAS

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    More about this item

    Keywords

    Inflation; Uncertainty; New Keynesian; Convexity; Marginal costs;
    All these keywords.

    JEL classification:

    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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