Abstract:
This paper aims to explore the impact of rising uncertainty on prices using micro-data on prices and multi-sector new Keynesian models. We identify diverse price responses to increasing macroeconomic uncertainty: goods with relatively flexible prices experience a decline due to lower demand caused by the rising uncertainty, while those with sticky prices experience an increase. The model suggests that economic uncertainty creates strategic complementarity for firms with sticky prices, prompting them to raise markups and prices in anticipation of potentially higher future inflation. These findings establish a connection between heightened uncertainty, higher core inflation, and increased profits.
