Ambiguous Business Cycles
AbstractThis 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 InfoPaper provided by Duke University, Department of Economics in its series Working Papers with number 12-06.
Date of creation: 2012
Date of revision:
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Other versions of this item:
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-06-05 (All new papers)
- NEP-BEC-2012-06-05 (Business Economics)
- NEP-DGE-2012-06-05 (Dynamic General Equilibrium)
- NEP-MAC-2012-06-05 (Macroeconomics)
- NEP-UPT-2012-06-05 (Utility Models & Prospect Theory)
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Blog mentionsAs found by EconAcademics.org, the blog aggregator for Economics research:CitEc Project, subscribe to its RSS feed for this item.
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