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The Inflation Uncertainty Amplifier

Author

Listed:
  • Efrem Castelnuovo

    (University of Padova, CESifo, and CAMA)

  • Giovanni Pellegrino

    (University of Padova and Aarhus University Author-Name: Laust L. Særkjær
    Aarhus University)

Abstract

We study how uncertainty shocks affect the macroeconomy across the inflation cycle using a nonlinear stochastic volatility-in-mean VAR. When inflation is high, uncertainty shocks raise inflation and depress real activity more sharply. A nonlinear New Keynesian model with second- moment shocks and trend inflation explains this via an "inflation-uncertainty amplifier": the interaction between high trend inflation and firms’ upward price bias magnifies the effects of uncertainty by increasing price dispersion. An aggressive policy response can replicate the allocation achieved under standard policy when trend inflation is low.

Suggested Citation

  • Efrem Castelnuovo & Giovanni Pellegrino, "undated". "The Inflation Uncertainty Amplifier," "Marco Fanno" Working Papers 0321, Dipartimento di Scienze Economiche "Marco Fanno".
    • Handle: RePEc:pad:wpaper:0321
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