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This paper studies the impact of uncertainty on economic activity in a canonical searchand-
matching framework with risk-averse households. A mean-preserving spread to future
productivity contracts current output even in the absence of nominal rigidities, although
the effect is significantly reinforced by the presence of the latter. This result reveals that
uncertainty shocks carry both contractionary demand and supply effects. In particular, a
more uncertain future increases the precautionary behavior of households, which reduces
interest rates and contracts demand. At the same time, as future asset prices are more
volatile and positively covary with aggregate consumption, households demand a larger
risk premium, which puts negative pressure on current asset values and contracts supply.
Thus, in comparison to a pure negative demand shock, an uncertainty shock puts less
deflationary pressure on the economy and, as a result, renders a flatter Phillips curve.
In contrast to a common explanation in the literature, these results do not rely on any
option-value considerations.
