Board of Governors of the Federal Reserve System

Figure 1. Inflation uncertainty indexes

This figure shows time series for the inflation uncertainty indexes for the United States, the black line, an aggregate for the advanced foreign economies in our sample, the red dashed line, and an aggregate of the emerging market economies, the blue dotted line. Inflation uncertainty indexes are standardized to facilitate interpretation. Inflation uncertainty for advanced foreign and emerging market economies are computed by standardizing each country’s uncertainty series over their historical mean (July 1980 to December 2023) before taking the equal-weighted average across the respective countries in each region. The figure shows that inflation uncertainty in the U.S. has remained exceptionally elevated since the onset of the COVID-19 pandemic and reached a record high in March 2023—about four standard deviations above its historical mean between 1980 and 2023. This surge in uncertainty was widespread, as seen when we average the inflation uncertainty measures for sets of advanced foreign and emerging market economies.

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Figure 2. Domestic and spillover effects of inflation uncertainty

This figure illustrates the impact of one-standard deviation shocks in domestic (the black line) and foreign (the blue dashed line) inflation uncertainty on h-quarters ahead domestic inflation uncertainty (panel A), the monetary policy rate (panel B), and investment growth between $$t$$ and $$t+h$$ (panel C). The dotted lines represent 95% confidence intervals. We show impulse-response functions for horizons between 1 and 12 quarters.

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Figure 3. Effect of foreign inflation uncertainty on U.S. investment growth for different levels of monetary policy rate differentials

This figure illustrates the impact of heterogeneity in monetary policy rate differentials on the relationship between foreign inflation uncertainty and investment growth in the United States. It depicts the pure effect of U.S. domestic inflation uncertainty on investment as a baseline reference (the black dotted line). Additionally, it shows the total effect of foreign inflation uncertainty at three distinct levels: (1) the largest average policy rate differential after 2021, represented by the Czech Republic (the red dash-dotted line); (2) the smallest average policy rate differential after 2021, represented by Japan (the green dashed line); and (3) a scenario with a zero policy rate differential (the blue line).

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