Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/319221 
Year of Publication: 
2025
Series/Report no.: 
CESifo Working Paper No. 11853
Publisher: 
CESifo GmbH, Munich
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 non-linear 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.
Subjects: 
uncertainty
trend inflation
nonlinear VAR model
new Keynesian model
monetary policy.
JEL: 
C32
E32
E44
G01
Document Type: 
Working Paper
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