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Ambiguity Aversion and Heterogeneity in Households' Beliefs

Author

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  • Claudio Michelacci
  • Luigi Paciello

Abstract

UK households that wish for lower inflation and lower nominal interest rates have higher expected inflation. We interpret the evidence through the lens of a New Keynesian model where ambiguity-averse households differ in wealth, skill, labor market participation, and the receipt of government transfers and are subject to Knightian uncertainty. Households act based on beliefs that are negatively affected by their wishes, the more so the greater the amount of uncertainty. Using indirect inference, we find substantial output costs due to uncertainty. Monetary policy uncertainty contributes little to the costs because households generally dislike monetary expansions.

Suggested Citation

  • Claudio Michelacci & Luigi Paciello, 2024. "Ambiguity Aversion and Heterogeneity in Households' Beliefs," American Economic Journal: Macroeconomics, American Economic Association, vol. 16(2), pages 95-126, April.
    • Handle: RePEc:aea:aejmac:v:16:y:2024:i:2:p:95-126
    DOI: 10.1257/mac.20200141
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    More about this item

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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