Uncertainty and Inflation

Stochastic simulations
1

Hello everyone,

I have a question concerning the response of inflation to a TFP uncertainty shock. I see from papers such as Basu and Bundick (2012) and Leduc and Liu (2014) that uncertainty shocks in NK models act as negative demand shocks. Nevertheless in my model, that is just a basic NK model (not too different from Basu and Bundick, just with Calvo pricing instead of Rotemberg), I get that inflation rises after an uncertainty shock. Do you know what that can depend on? I’m using Gohde-Meyer and Lan’s dynare add-on to make the IRFs (which works with dynare 4.3), but using Andreasen’s code I get the same thing (inflation going up).

Thanks in advance for the comments.
NKM.mod (5.54 KB)

2

Did you maybe try your code with Rotemberg pricing instead of Calvo?

3

Try varying parameters. Depending on the stickiness and the monetary policy rule, an uncertainty shock could also be stagflationary.

4

Dear jpfeifer

I also found the positive response of inflation to a TFP uncertainty shock ( I used Gerali et.al(2010) model).

Then, is it only problem of inappropriate parameters? (should this problem be fixed?) or can we justify the stagflation depending on models?

Thank you.