The Economic Effects of Global Inflation Uncertainty

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 measure for the group of seven advanced economies and seven large emerging market economies. Using the novel cross-country data, we estimate a panel structural VAR model to analyze how inflation uncertainty affects macroeconomic and financial variables. Finally, we explore the transmission channels of the uncertainty shock through the lens of the dynamic stochastic general equilibrium (DSGE) model. We find that inflation uncertainty has sharply risen globally since the COVID-19 pandemic, reaching historically high levels comparable to those of the 1970s and 1980s. The empirical results suggest that higher inflation uncertainty has been unambiguously followed by large economic growth declines, particularly in investment. Meanwhile, the relationship between inflation uncertainty and inflation has been heterogeneous across countries and time-varying. The simulation results from our DSGE model suggest that different types of propagation channels, through demand and supply, of inflation uncertainty shocks could lead to negative business-cycle comovement and heterogeneous consequences on inflation.