The supply and demand-side impacts of uncertainty shocks. Evidence on advanced and emerging economies

Pagliacci, Carolina (2021): The supply and demand-side impacts of uncertainty shocks. Evidence on advanced and emerging economies.

Abstract

Uncertainty has broad impacts on the economy, but it is unclear whether it affects only aggregate demand or both sides of the market. Using available uncertainty measures, this paper aims to quantify the impact of uncertainty shocks on output growth and inflation through their effects on aggregate supply and demand. The empirical strategy, applied to 19 advanced and 15 emerging countries, involves two steps. First, identifying in each country the parts of GDP-growth and GDP-inflation that are explained by shifts in aggregate supply and demand curves respectively. Second, estimating the country-effects of two (financial and non-financial) uncertainty shocks on the supply/demand components for growth and inflation. Considerations on reverse causality and identification of uncertainty types are made. Results show that in advanced and emerging economies, financial uncertainty shocks affect both sides of the market. When faced with greater uncertainty, consumers demand fewer goods, but producers reduce their supply as well, cutting back production and attempting to raise prices. Since the demand-side are larger than the supply-side effects, these shocks end up reducing inflation in all countries. Alternatively, non-financial uncertainty shocks’ impacts on output are rather small.

• Item Type: MPRA Paper
• Language: English
• Keywords: uncertainty, aggregate demand, aggregate supply, inflation, output growth
• Subjects: C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C18 - Methodological Issues: General; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles

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