On macroeconomic uncertainty

The surge in macroeconomic uncertainty during economic crises – the role of dispersed information

In this paper Yu-Ting Chiang develops a model where uncertainty rises endogenously as agents pay attention to macroeconomic events while receiving dispersed information. In particular, agents focus more on the state of  the economy when they perceive that a downturn is imminent because resources become more valuable when expected income is low. As they react strongly to the information they receive their endogenous reaction increases the following four measures of macroeconomic uncertainty:

1. An increase in aggregate output volatility;
2. An increase in cross-sectional output dispersion;
3. Higher forecast dispersion about aggregate output, and;
4. More subjective uncertainty about aggregate output for each agent in the economy.

Countercyclical fluctuations in attention and the above four measures of uncertainty are prominent business cycle phenomena in the data. The intuition behind this result is that as information is dispersed, agents are uncertain about others’ aggregate responses: as agents pay attention and react, each agent faces more uncertainty about the aggregate outcome due to their inability to predict other agents’ endogenous responses, despite having learned more about the exogenous state of the economy.

Attention and Fluctuations in Macroeconomic Uncertainty
Author: Yu-Ting Chiang
From: Federal Reserve Bank of St. Louis

Monetary policy and uncertainty

In this paper Cacciatore et al. identify four sources of uncertainty for the conduct of monetary policy:

1. Data, revisions and uncertainty about unobservable variables;
2. Unobserved variables: uncertainties about the output gap, the natural rate of interest and maximum sustainable employment;
3. From employment and output gaps to inflation: uncertainties about the Phillips curve;
4. Can we learn about the output gap through inflation outcomes and the Phillips curve?

The authors look at the literature, addressing the costs and benefits of purposeful monetary policy experimentation at times of heightened uncertainty. They find:

A common result across studies is that the optimal policy typically includes an experimentation component—deliberate policy actions designed to help the central bank better understand the economy’s behaviour.[…] Optimal experimentation can also lead to a more aggressive monetary policy response because an activist policy can generate information that may improve future macroeconomic stabilization.

Uncertainty and Monetary Policy Experimentation: Empirical Challenges and Insights from Academic Literature
Authors: Matteo Cacciatore, Dmitry Matveev, Rodrigo Sekkel
From: Bank of Canada