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Ambiguous Business Cycles

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  • Cosmin Ilut
  • Martin Schneider

Abstract

This paper considers business cycle models with agents who dislike both risk and ambiguity (Knightian uncertainty). Ambiguity aversion is described by recursive multiple priors preferences that capture agents' lack of con fidence in probability assessments. While modeling changes in risk typically requires higher-order approximations, changes in ambiguity in our models work like changes in conditional means. Our models thus allow for uncertainty shocks but can still be solved and estimated using first-order approximations. In our estimated medium-scale DSGE model, a loss of confi dence about productivity works like `unrealized' bad news. Time-varying con fidence emerges as a major source of business cycle fluctuations.

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Bibliographic Info

Paper provided by Duke University, Department of Economics in its series Working Papers with number 12-06.

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Length: 54
Date of creation: 2012
Date of revision:
Handle: RePEc:duk:dukeec:12-06

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Postal: Department of Economics Duke University 213 Social Sciences Building Box 90097 Durham, NC 27708-0097
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Fax: (919) 684-8974
Web page: http://econ.duke.edu/

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  1. Ambiguous Business Cycles
    by Christian Zimmermann in NEP-DGE blog on 2012-06-09 20:57:11
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Cited by:
  1. Thorsten Drautzburg & Harald Uhlig, 2011. "Fiscal Stimulus and Distortionary Taxation," 2011 Meeting Papers 481, Society for Economic Dynamics.
  2. Nicholas Bloom, 2014. "Fluctuations In Uncertainty," Working Papers 14-17, Center for Economic Studies, U.S. Census Bureau.
  3. Bidder, R.M. & Smith, M.E., 2012. "Robust animal spirits," Journal of Monetary Economics, Elsevier, vol. 59(8), pages 738-750.
  4. 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.
  5. Larry G. Epstein & Shaolin Ji, 2013. "Ambiguous Volatility and Asset Pricing in Continuous Time," Review of Financial Studies, Society for Financial Studies, vol. 26(7), pages 1740-1786.
  6. Lars Peter Hansen, 2012. "Risk Pricing over Alternative Investment Horizons," Working Papers 2012-008, Becker Friedman Institute for Research In Economics.
  7. Erzo G.J. Luttmer, 2013. "The Stolper-Samuelson effects of a decline in aggregate consumption," Working Papers 703, Federal Reserve Bank of Minneapolis.

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