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Unraveling the Impact of Higher Uncertainty on Profits and Inflation

Author

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  • Engin Kara
  • Ahmed Pirzada

Abstract

This paper aims to explore the impact of rising uncertainty on prices using micro-data on prices and multi-sector new Keynesian models. We identify diverse price responses to increasing macroeconomic uncertainty: goods with relatively flexible prices experience a decline due to lower demand caused by the rising uncertainty, while those with sticky prices experience an increase. The model suggests that economic uncertainty creates strategic complementarity for firms with sticky prices, prompting them to raise markups and prices in anticipation of potentially higher future inflation. These findings establish a connection between heightened uncertainty, higher core inflation, and increased profits.

Suggested Citation

  • Engin Kara & Ahmed Pirzada, 2023. "Unraveling the Impact of Higher Uncertainty on Profits and Inflation," CESifo Working Paper Series 10587, CESifo.
  • Handle: RePEc:ces:ceswps:_10587
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    File URL: https://www.cesifo.org/DocDL/cesifo1_wp10587.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    uncertainty; inflation; heterogeneity in price stickiness; micro-data on prices; New Keynesian;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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