Global Inflation Uncertainty : Measures and Applications

This paper investigates the impacts of inflation uncertainty on inflation and economic activities. We take three steps. We first put together various measures of inflation uncertainty—including survey- and model-based - and extract a common inflation uncertainty for the group of seven advanced economies and seven large emerging market economies. Using the inflation uncertainty, we estimate a panel structural VAR model that allows us to examine the impact of inflation uncertainty on macroeconomic and financial variables. Finally, we explore the transmission channels of the uncertainty shock through the lens of dynamic stochastic general equilibrium (DSGE) model. We find that the inflation uncertainty has sharply risen globally since the COVID-19 pandemic, beyond the level of the late-2000s and almost comparable to the historically high level in the 1970s and 1980s. The empirical results suggest that higher inflation uncertainty has been unambiguously followed by large declines in economic growth, in particular in investment. Meanwhile, the relationship between inflation uncertainty and inflation has been heterogeneous across countries and time-varying. The DSGE model we estimate suggests that different types of propagation channels - demand- and supply-driven - of inflation uncertainty shocks lead to heterogeneous consequences on output and inflation