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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 confidence 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 confidence about productivity works like 'unrealized' bad news. Time-varying confidence emerges as a major source of business cycle fluctuations.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17900.

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Date of creation: Mar 2012
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Handle: RePEc:nbr:nberwo:17900

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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. 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.
  2. Drautzburg, Thorsten & Uhlig, Harald, 2011. "Fiscal stimulus and distortionary taxation," ZEW Discussion Papers 11-037, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  3. Lars Peter Hansen, 2012. "Risk Pricing over Alternative Investment Horizons," Working Papers 2012-008, Becker Friedman Institute for Research In Economics.
  4. Erzo G.J. Luttmer, 2013. "The Stolper-Samuelson effects of a decline in aggregate consumption," Working Papers 703, Federal Reserve Bank of Minneapolis.
  5. Bidder, R.M. & Smith, M.E., 2012. "Robust animal spirits," Journal of Monetary Economics, Elsevier, vol. 59(8), pages 738-750.
  6. 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.
  7. Nicholas Bloom, 2014. "Fluctuations In Uncertainty," Working Papers 14-17, Center for Economic Studies, U.S. Census Bureau.

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