In the so-called new neoclassical synthesis, expected future output and inflation enter the model equations for demand and supply, since households and firms take into account forecasts of endogenous variables in their consumption and pricing decisions. However, the linear model equations of the new neoclassical synthesis reflect the behavior of risk-neutral economic subjects and firms, since market participants are indifferent to deviations of actual values of endogenous variables from previously predicted levels, which is in contrast to the risk-aversion reflected in the utility functions used in the underlying microfoundation. In this paper, we show that risk-averse economic subjects and firms form rational expectations not only regarding the expected values but also regarding uncertainty in future variables, impacting the model equations for demand and supply and the conduct of monetary policy. We assume costs of re-allocation to occur when actual values of endogenous variables differ from previous predictions, and non-linear decision rules. Uncertainty in future demand results in potential misinvestments of firms, reducing productivity and hence reducing the natural output. Uncertainty in future inflation and non-linearity of profit function results in tendency to „over-price“ products and hence creates inflationary pressures in the IA curve.
Regarding the impact of uncertainty on the conduct of monetary policy, we find an additional inflation bias, due to incentives of firms to “over-price” products, which cannot be removed by rule-based-policy (JEL D81, E10, E52).