Inflation expectation uncertainty, inflation and the output gap

Angela Fuest and Torsten Schmidt

No 673, Ruhr Economic Papers from RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen

Abstract: Uncertainty about the future path of inflation affects consumption, saving and investment decisions as well as wage negotiations and price setting of firms. These decisions are based on inflation expectations which are a key determinant of inflation in the New Keynesian Phillips Curve. In this paper we therefore explicitly analyse the relationship between inflation expectations, the inflation rate and the output gap and the variance of these variables as uncertainty measures by using a VAR-GARCH-inmean model. Our main finding is that inflation expectation uncertainty is positively related to expected inflation and to the inflation rate.

Keywords: inflation expectations; inflation uncertainty; VAR-GARCH-M models (search for similar items in EconPapers)
JEL-codes: C22 E31 E32 (search for similar items in EconPapers)
Date: 2017
New Economics Papers: this item is included in nep-mac and nep-mon
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Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Inflation Expectation Uncertainty, Inflation and the Outputgap (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:rwirep:673

DOI: 10.4419/86788780

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