Adriana Kugler: Sources of Risk and Inflation
In a companion piece, I laid out why research on uncertainty and inflation has produced such contradictory results: the studies simply do not separate uncertainty by source. Here I want to walk through what happens once you do, because the results are genuinely striking. I have presented this work in academic settings, including a lecture at the London School of Economics on monetary policy under geopolitical shocks . Take three specific kinds of risk: trade policy uncertainty, geopolitical risk tied to oil, and uncertainty stemming from national security concerns. Analyze these separately instead of folding them into one broad uncertainty variable, and each one carries its own distinct economic signature. Trade policy uncertainty produces the inflationary effect you would expect. Oil-linked geopolitical risk starts out inflationary too, since disruptions to oil supply push energy prices higher, but that effect eventually flips and becomes disinflationary. The third source runs the opp...