Global Inflation Uncertainty: Measures and Applications

This paper investigates the impacts of inflation uncertainty on inflation and economic activities in three steps. We first compile various inflation uncertainty measures and extract a common component for the group of advanced economies and emerging market economies. Using the measure, we estimate a panel structural VAR model to examine the impact of inflation uncertainty on the economies. Finally, we explore the transmission channels of the uncertainty shock through the lens of DSGE model. We find that the inflation uncertainty has sharply risen globally since the COVID-19, almost comparable to the historically high level in the 1970s-80s. Our results suggest that higher inflation uncertainty has been unambiguously followed by large economic downturns. Meanwhile, the relationship between inflation uncertainty and inflation has been heterogeneous across countries and time-varying. The model suggests that demand- and supply-driven propagation channels of inflation uncertainty shocks lead to negative business-cycle comovement and heterogeneous consequences on inflation.