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 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 InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17900.
Date of creation: Mar 2012
Date of revision:
Note: EFG ME
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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-2012-03-21 (All new papers)
- NEP-DGE-2012-03-21 (Dynamic General Equilibrium)
- NEP-MAC-2012-03-21 (Macroeconomics)
- NEP-UPT-2012-03-21 (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.
- Thorsten Drautzburg & Harald Uhlig, 2011.
"Fiscal Stimulus and Distortionary Taxation,"
NBER Working Papers
17111, National Bureau of Economic Research, Inc.
- Thorsten Drautzburg & Harald Uhlig, 2011. "Fiscal Stimulus and Distortionary Taxation," 2011 Meeting Papers 481, Society for Economic Dynamics.
- 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.
- Thorsten Drautzburg & Harald Uhlig, 2011. "Fiscal Stimulus and Distortionary Taxation," Working Papers 2011-005, Becker Friedman Institute for Research In Economics.
- Thorsten Drautzburg & Harald Uhlig, 2011. "Fiscal stimulus and distortionary taxation," CQER Working Paper 2011-01, Federal Reserve Bank of Atlanta.
- Larry G. Epstein & Shaolin Ji, 2013.
"Ambiguous volatility and asset pricing in continuous time,"
- Larry G. Epstein & Shaolin Ji, 2012. "Ambiguous Volatility and Asset Pricing in Continuous Time," CIRANO Working Papers 2012s-29, CIRANO.
- 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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