Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/262061 
Year of Publication: 
2022
Series/Report no.: 
Staff Report No. 1011
Publisher: 
Federal Reserve Bank of New York, New York, NY
Abstract: 
This paper analyzes a new stylized fact: The correlation between uncertainty shocks and changes in inflation expectations has declined and turned negative over the past quarter century. It rationalizes this fact within a standard New Keynesian model with a lower bound on interest rates combined with a decline in the natural rate of interest. With a lower natural rate, the likelihood of the lower bound binding increased and the effects of uncertainty on the economy became more pronounced. In such an environment, increases in uncertainty raise the possibility that the central bank will be unable to eliminate inflation shortfalls following negative demand shocks. As a result, the observed decline in the correlation between uncertainty and inflation expectations emerges. Average-inflation targeting policies can mitigate the longer-run effects of increases in uncertainty on the real economy.
JEL: 
E52
Document Type: 
Working Paper

Files in This Item:
File
Size
1.08 MB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.