Inflationary Household Uncertainty Shocks
61 Pages Posted: 30 Apr 2020
Date Written: April 30, 2020
I construct a novel measure of household uncertainty based on survey data for European countries. I show that household uncertainty shocks are not universally like negative demand shocks. Notably, household uncertainty shocks are largely inflationary in Europe. These results lend support to a pricing bias mechanism as an important transmission channel. A comparison of results across countries suggest that demographics and factors related to average markups along with monetary policy play a role in the transmission of household uncertainty to inflation. I develop an Overlapping Generations New Keynesian model with Deep Habits to rationalize these results.
Keywords: uncertainty, inflation, household expectations, deep habits, demographics
JEL Classification: D84, E20, E30, E71
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