Does uncertainty amplify the inflation pass-through of gasoline price shocks?

Abstract

We study how U.S. inflation uncertainty responds to gasoline price shocks and how strongly the endogenous response of uncertainty influences the inflationary effects of these shocks. Using a VAR with stochastic volatility, which allows for delayed endogenous responses of volatility to level shocks, we find that uncertainty associated with U.S. inflation rises in response to adverse gasoline price shocks. A counterfactual exercise shows that gasoline price shocks help explain inflation uncertainty, but the feedback from inflation uncertainty to inflation is quantitatively negligible.