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Three Types of Ambiguity

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  • Lars Peter Hansen

    ()
    (The University of Chicago)

  • Thomas J. Sargent

    (New York University)

Abstract

For each of three types of ambiguity, we compute a robust Ramsey plan and an associated worst-case probability model. Ex post, ambiguity of type I implies endogenously distorted homogeneous beliefs, while ambiguities of types II and III imply distorted heterogeneous beliefs. Martingales characterize alternative probability specifications and clarify distinctions among the three types of ambiguity. We use recursive formulations of Ramsey problems to impose local predictability of commitment multipliers directly. To reduce the dimension of the state in a recursive formulation, we transform the commitment multiplier to accommodate the heterogeneous beliefs that arise with ambiguity of types II and III. Our formulations facilitate comparisons of the consequences of these alternative types of ambiguity.

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Bibliographic Info

Paper provided by Becker Friedman Institute for Research In Economics in its series Working Papers with number 2012-006.

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Date of creation: 2012
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Handle: RePEc:bfi:wpaper:2012-006

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Web page: http://bfi.uchicago.edu/
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Keywords: robustness; ambiguity; martingales; Ramsey plan; commitment; local predictability; heterogeneous beliefs;

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  1. Evan W. Anderson & Lars Peter Hansen & Thomas J. Sargent, 2003. "A Quartet of Semigroups for Model Specification, Robustness, Prices of Risk, and Model Detection," Journal of the European Economic Association, MIT Press, vol. 1(1), pages 68-123, 03.
  2. Albert Marcet & Ramon Marimon, 2011. "Recursive Contracts," Working Papers 552, Barcelona Graduate School of Economics.
  3. Thomas J. Sargent & Riccardo Colacito & Lars P. Hansen & Timothy Cogley, 2008. "Robustness and US Monetary," 2008 Meeting Papers 228, Society for Economic Dynamics.
  4. Michael Woodford, 2005. "Robustly Optimal Monetary Policy with Near Rational Expectations," NBER Working Papers 11896, National Bureau of Economic Research, Inc.
  5. Hansen, Lars Peter & Sargent, Thomas J., 2007. "Recursive robust estimation and control without commitment," Journal of Economic Theory, Elsevier, vol. 136(1), pages 1-27, September.
  6. Giordani, Paolo & Söderlind, Paul, 2002. "Solution of Macromodels with Hansen-Sargent Robust Policies: Some Extensions," Working Paper Series in Economics and Finance 499, Stockholm School of Economics, revised 15 May 2003.
  7. Kai Leitemo & Ulf Söderström, 2005. "Robust monetary policy in the New-Keynesian framework," Macroeconomics 0508032, EconWPA.
  8. Olalla, Myriam García & Gómez, Alejandro Ruiz, 2011. "Robust control and central banking behaviour," Economic Modelling, Elsevier, vol. 28(3), pages 1265-1278, May.
  9. Anderson, Evan W., 2005. "The dynamics of risk-sensitive allocations," Journal of Economic Theory, Elsevier, vol. 125(2), pages 93-150, December.
  10. Dumas, Bernard & Uppal, Raman & Wang, Tan, 2000. "Efficient Intertemporal Allocations with Recursive Utility," Journal of Economic Theory, Elsevier, vol. 93(2), pages 240-259, August.
  11. Jaroslav Borovicka & Lars Peter Hansen, 2011. "Examining Macroeconomic Models Through the Lens of Asset Pricing," Working Papers 2011-012, Becker Friedman Institute for Research In Economics.
  12. Lars Ljungqvist & Thomas J. Sargent, 2004. "Recursive Macroeconomic Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 026212274x, December.
  13. Hansen, Lars Peter & Sargent, Thomas J. & Turmuhambetova, Gauhar & Williams, Noah, 2006. "Robust control and model misspecification," Journal of Economic Theory, Elsevier, vol. 128(1), pages 45-90, May.
  14. Karantounias, Anastasios G., 2013. "Managing pessimistic expectations and fiscal policy," Theoretical Economics, Econometric Society, vol. 8(1), January.
  15. Pierpaolo Battigalli & Simone Cerreia-Vioglio & Fabio Maccheroni & Massimo Marinacci, 2011. "Selfconfirming Equilibrium and Uncertainty," Working Papers 428, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  16. Walsh, Carl E, 2004. "Robustly Optimal Instrument Rules and Robust Control: An Equivalence Result," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(6), pages 1105-13, December.
  17. Thomas J. Sargent & LarsPeter Hansen, 2001. "Robust Control and Model Uncertainty," American Economic Review, American Economic Association, vol. 91(2), pages 60-66, May.
  18. Gilboa, Itzhak & Schmeidler, David, 1989. "Maxmin expected utility with non-unique prior," Journal of Mathematical Economics, Elsevier, vol. 18(2), pages 141-153, April.
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Cited by:
  1. Athanasios Yannacopoulos & Anastasios Xepapadeas, . "Climate Change Policy under Spatially Structured Ambiguity: Hot Spots and the Precautionary Principle," DEOS Working Papers 1332, Athens University of Economics and Business.
  2. Richard Dennis, 2012. "Imperfect Credibility and Robust Monetary Policy," ANU Working Papers in Economics and Econometrics 2012-582, Australian National University, College of Business and Economics, School of Economics.

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