Inflationary Household Uncertainty Shocks

Abstract I use a survey‐based measure of household uncertainty for the Euro area and show that household uncertainty shocks raise unemployment and are inflationary in Europe. On top of conventional recursive identification schemes, I make use of narrative proxy and narrative sign and ratio restrictions identification strategies to verify the robustness of the results. I document evidence in support of an increase in markups and to some extent also savings and labor supply consistent with precautionary pricing, and precautionary savings behavior by households. As precautionary pricing behavior is motivated by firms' uncertainty, other inflationary mechanisms may also be at work.