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Three types of ambiguity

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  • Lars Peter Hansen

    ()
    (University of Chicago - Department of Economics)

  • Thomas J. Sargent

    ()
    (New York University)

Abstract

For each of three types of ambiguity, we compute a robust Ramsey plan and anassociated worst-case probability model. Ex post, ambiguity of type I implies en-dogenously distorted homogeneous beliefs, while ambiguities of types II and III implydistorted heterogeneous beliefs. Martingales characterize alternative probability spec-ifications and clarify distinctions among the three types of ambiguity. We use recur-sive formulations of Ramsey problems to impose local predictability of commitmentmultipliers directly. To reduce the dimension of the state in a recursive formulation,we transform the commitment multiplier to accommodate the heterogeneous beliefsthat arise with ambiguity of types II and III. Our formulations facilitate comparisonsof the consequences of these alternative types of ambiguity.

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

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Handle: RePEc:bfi:wpaper:2012-006

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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. Hansen, Lars Peter & Sargent, Thomas J., 2005. "Recursive robust estimation and control without commitment," Discussion Paper Series 1: Economic Studies 2005,28, Deutsche Bundesbank, Research Centre.
  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, 2010. "Robustly Optimal Monetary Policy with Near-Rational Expectations," American Economic Review, American Economic Association, vol. 100(1), pages 274-303, March.
  5. Jaroslav Borovicka & Lars Hansen, 2012. "Examining macroeconomic models through the lens of asset pricing," Working Paper Series WP-2012-01, Federal Reserve Bank of Chicago.
  6. Karantounias, Anastasios G., 2013. "Managing pessimistic expectations and fiscal policy," Theoretical Economics, Econometric Society, vol. 8(1), January.
  7. Albert Marcet & Ramon Marimon, 1994. "Recursive contracts," Economics Working Papers 337, Department of Economics and Business, Universitat Pompeu Fabra, revised Oct 1998.
  8. Kai Leitemo & Ulf Soderstrom, 2004. "Robust Monetary Policy in the New-Keynesian Framework," Working Papers 273, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  9. 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.
  10. Olalla, Myriam García & Gómez, Alejandro Ruiz, 2011. "Robust control and central banking behaviour," Economic Modelling, Elsevier, vol. 28(3), pages 1265-1278, May.
  11. 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.
  12. 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.
  13. Lars Ljungqvist & Thomas J. Sargent, 2004. "Recursive Macroeconomic Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 026212274x, December.
  14. Gilboa, Itzhak & Schmeidler, David, 1989. "Maxmin expected utility with non-unique prior," Journal of Mathematical Economics, Elsevier, vol. 18(2), pages 141-153, April.
  15. Giordani, Paolo & Soderlind, Paul, 2004. "Solution of macromodels with Hansen-Sargent robust policies: some extensions," Journal of Economic Dynamics and Control, Elsevier, vol. 28(12), pages 2367-2397, December.
  16. Anderson, Evan W., 2005. "The dynamics of risk-sensitive allocations," Journal of Economic Theory, Elsevier, vol. 125(2), pages 93-150, 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. 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.
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Cited by:
  1. Richard Dennis, 2013. "Imperfect Credibility and Robust Monetary Policy," CAMA Working Papers 2013-68, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  2. Luciano I. de Castro & Marialaura Pesce & Nicholas C. Yannelis, 2013. "A New Perspective on Rational Expectations," The School of Economics Discussion Paper Series 1316, Economics, The University of Manchester.
  3. 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.

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