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Inflation Uncertainty and Endogenous Planning Horizons

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Abstract

We develop a finite-horizon planning model in which firms choose how far ahead to plan when setting prices. Planning further ahead improves a firm's pricing decision but requires cognitive effort. We derive analytical solutions for a firm's chosen planning horizon and show that large and persistent aggregate demand or supply disturbances induce firms to plan further ahead, making inflation more sensitive to shocks and generating endogenous movements in inflation uncertainty. Quantitatively, we show that the model matches the positive relationship between the size of inflation forecast revisions and inflation uncertainty observed in the data.

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  • Christopher J. Gust & Edward P. Herbst & J. David López-Salido, 2026. "Inflation Uncertainty and Endogenous Planning Horizons," Finance and Economics Discussion Series 103617, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:103617
    DOI: 10.17016/FEDS.2026.055
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    References listed on IDEAS

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    1. N. Gregory Mankiw & Ricardo Reis, 2002. "Sticky Information versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 117(4), pages 1295-1328.
    2. Boutros, Michael, 2026. "Windfall income shocks with finite planning horizons," Journal of Financial Economics, Elsevier, vol. 176(C).
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