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Three Types of Ambiguity

Author

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  • Lars Peter Hansen

    () (The University of Chicago)

  • Thomas J. Sargent

    (New York University)

Abstract

For each of three types of ambiguity, we compute a robust Ramsey plan and an associated worst-case probability model. Ex post, ambiguity of type I implies endogenously distorted homogeneous beliefs, while ambiguities of types II and III imply distorted heterogeneous beliefs. Martingales characterize alternative probability specifications and clarify distinctions among the three types of ambiguity. We use recursive formulations of Ramsey problems to impose local predictability of commitment multipliers directly. To reduce the dimension of the state in a recursive formulation, we transform the commitment multiplier to accommodate the heterogeneous beliefs that arise with ambiguity of types II and III. Our formulations facilitate comparisons of the consequences of these alternative types of ambiguity.

Suggested Citation

  • Lars Peter Hansen & Thomas J. Sargent, 2012. "Three Types of Ambiguity," Working Papers 2012-006, Becker Friedman Institute for Research In Economics.
  • Handle: RePEc:bfi:wpaper:2012-006
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    References listed on IDEAS

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    1. Giordani, Paolo & Soderlind, Paul, 2004. "Solution of macromodels with Hansen-Sargent robust policies: some extensions," Journal of Economic Dynamics and Control, Elsevier, vol. 28(12), pages 2367-2397, December.
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    9. Thomas J. Sargent & LarsPeter Hansen, 2001. "Robust Control and Model Uncertainty," American Economic Review, American Economic Association, vol. 91(2), pages 60-66, May.
    10. Borovička, Jaroslav & Hansen, Lars Peter, 2014. "Examining macroeconomic models through the lens of asset pricing," Journal of Econometrics, Elsevier, vol. 183(1), pages 67-90.
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    Cited by:

    1. repec:eee:ecolet:v:155:y:2017:i:c:p:9-13 is not listed on IDEAS
    2. Esther Hauk & Andrea Lanteri & Albert Marcet, 2016. "Optimal Policy with General Signal Extraction," Working Papers 932, Barcelona Graduate School of Economics.
    3. Athanasios Yannacopoulos & Anastasios Xepapadeas, "undated". "Climate Change Policy under Spatially Structured Ambiguity: Hot Spots and the Precautionary Principle," DEOS Working Papers 1332, Athens University of Economics and Business.
    4. Kwon, Hyosung & Miao, Jianjun, 2017. "Three types of robust Ramsey problems in a linear-quadratic framework," Journal of Economic Dynamics and Control, Elsevier, vol. 76(C), pages 211-231.
    5. Jianjun Miao & Alejandro Rivera, 2016. "Robust Contracts in Continuous Time," Econometrica, Econometric Society, vol. 84, pages 1405-1440, July.
    6. Hansen, Lars Peter & Sargent, Thomas J., 2015. "Four types of ignorance," Journal of Monetary Economics, Elsevier, vol. 69(C), pages 97-113.
    7. Anastasios Xepapadeas & Athanasios Yannacopoulos, 2018. "Spatially Structured Deep Uncertainty, Robust Control, and Climate Change Policies," DEOS Working Papers 1807, Athens University of Economics and Business.
    8. Dennis, Richard, 2014. "Imperfect credibility and robust monetary policy," Journal of Economic Dynamics and Control, Elsevier, vol. 44(C), pages 218-234.
    9. Balbás, Alejandro & Balbás, Beatriz & Balbás, Raquel, 2016. "Good deals and benchmarks in robust portfolio selection," European Journal of Operational Research, Elsevier, vol. 250(2), pages 666-678.

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