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Risk and ambiguity in models of business cycles

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  • Backus, David
  • Ferriere, Axelle
  • Zin, Stanley

Abstract

We inject aggregate uncertainty — risk and ambiguity — into an otherwise standard business cycle model and describe its consequences. We find that increases in uncertainty generally reduce consumption, but they do not account, in this model, for either the magnitude or the persistence of the most recent recession. We speculate about extensions that might do better along one or both dimensions.

Suggested Citation

  • Backus, David & Ferriere, Axelle & Zin, Stanley, 2015. "Risk and ambiguity in models of business cycles," Journal of Monetary Economics, Elsevier, vol. 69(C), pages 42-63.
    • Handle: RePEc:eee:moneco:v:69:y:2015:i:c:p:42-63
    DOI: 10.1016/j.jmoneco.2014.12.005
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    More about this item

    Keywords

    Uncertainty; Smooth ambiguity; Certainty equivalent; Recursive preferences; Pricing kernel; Asset returns; Learning;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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