IDEAS home Printed from https://ideas.repec.org/p/eie/wpaper/2006.html
   My bibliography  Save this paper

Aggregate Risk or Aggregate Uncertainty? Evidence from UK Households

Author

Listed:
  • Claudio Michelacci

    (EIEF and CEPR)

  • Luigi Paciello

    (EIEF and CEPR)

Abstract

Using the Bank of England Inflation Attitudes Survey we find that households with preferences for higher inflation and higher interest rates have lower expected inflation. The wedge is mildly correlated with existing measures of uncertainty and increases after major economic events such as the failure of Lehman Brothers or the Brexit referendum. We interpret the wedge as due to Knightian uncertainty about future monetary policy and the underlying economic environment. If households had treated uncertainty as measurable risk, consumption and output would have been around 1 percent higher both during the Great Recession and in recent years.

Suggested Citation

  • Claudio Michelacci & Luigi Paciello, 2020. "Aggregate Risk or Aggregate Uncertainty? Evidence from UK Households," EIEF Working Papers Series 2006, Einaudi Institute for Economics and Finance (EIEF), revised Apr 2020.
  • Handle: RePEc:eie:wpaper:2006
    as

    Download full text from publisher

    File URL: http://www.eief.it/eief/images/WP_20.06.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Riccardo M Masolo & Francesca Monti, 2021. "Ambiguity, Monetary Policy and Trend Inflation," Journal of the European Economic Association, European Economic Association, vol. 19(2), pages 839-871.
    2. George-Marios Angeletos & Chen Lian, 2018. "Forward Guidance without Common Knowledge," American Economic Review, American Economic Association, vol. 108(9), pages 2477-2512, September.
    3. Olivier Armantier & Wändi Bruine de Bruin & Giorgio Topa & Wilbert van der Klaauw & Basit Zafar, 2015. "Inflation Expectations And Behavior: Do Survey Respondents Act On Their Beliefs?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 56(2), pages 505-536, May.
    4. Tomasz Strzalecki, 2011. "Axiomatic Foundations of Multiplier Preferences," Econometrica, Econometric Society, vol. 79(1), pages 47-73, January.
    5. Lars Peter Hansen & Thomas J Sargent, 2014. "Robust Control and Model Uncertainty," World Scientific Book Chapters, in: UNCERTAINTY WITHIN ECONOMIC MODELS, chapter 5, pages 145-154, World Scientific Publishing Co. Pte. Ltd..
    6. Francesco Bianchi & Cosmin L. Ilut & Martin Schneider, 2018. "Uncertainty Shocks, Asset Supply and Pricing over the Business Cycle," Review of Economic Studies, Oxford University Press, vol. 85(2), pages 810-854.
    7. Christian Broda & David E. Weinstein, 2006. "Globalization and the Gains From Variety," The Quarterly Journal of Economics, Oxford University Press, vol. 121(2), pages 541-585.
    8. Hikaru Saijo & Cosmin Ilut, 2015. "Learning, Confidence, and Business Cycles," 2015 Meeting Papers 917, Society for Economic Dynamics.
    9. Guvenen, Fatih, 2006. "Reconciling conflicting evidence on the elasticity of intertemporal substitution: A macroeconomic perspective," Journal of Monetary Economics, Elsevier, vol. 53(7), pages 1451-1472, October.
    10. Cosmin L. Ilut & Martin Schneider, 2014. "Ambiguous Business Cycles," American Economic Review, American Economic Association, vol. 104(8), pages 2368-2399, August.
    11. Claudio Michelacci & Luigi Paciello, 2020. "Ambiguous Policy Announcements," Review of Economic Studies, Oxford University Press, vol. 87(5), pages 2356-2398.
    12. Cosmin Ilut, 2012. "Ambiguity Aversion: Implications for the Uncovered Interest Rate Parity Puzzle," American Economic Journal: Macroeconomics, American Economic Association, vol. 4(3), pages 33-65, July.
    13. Nevo, Aviv, 2001. "Measuring Market Power in the Ready-to-Eat Cereal Industry," Econometrica, Econometric Society, vol. 69(2), pages 307-342, March.
    14. Jeffrey M Wooldridge, 2010. "Econometric Analysis of Cross Section and Panel Data," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262232588, December.
    15. Hausman, Jerry, 2015. "Specification tests in econometrics," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 38(2), pages 112-134.
    16. Cosmin Ilut & Rosen Valchev & Nicolas Vincent, 2020. "Paralyzed by Fear: Rigid and Discrete Pricing Under Demand Uncertainty," Econometrica, Econometric Society, vol. 88(5), pages 1899-1938, September.
    17. Lee, Lung-Fei, 1979. "Identification and Estimation in Binary Choice Models with Limited (Censored) Dependent Variables," Econometrica, Econometric Society, vol. 47(4), pages 977-996, July.
    18. Olivier Coibion & Yuriy Gorodnichenko & Tiziano Ropele, 2020. "Inflation Expectations and Firm Decisions: New Causal Evidence," The Quarterly Journal of Economics, Oxford University Press, vol. 135(1), pages 165-219.
    19. Epstein, Larry G. & Schneider, Martin, 2003. "Recursive multiple-priors," Journal of Economic Theory, Elsevier, vol. 113(1), pages 1-31, November.
    20. Riccardo M Masolo & Francesca Monti, 0. "Ambiguity, Monetary Policy and Trend Inflation," Journal of the European Economic Association, European Economic Association, vol. 19(2), pages 839-871.
    21. Straub, Ludwig & Ulbricht, Robert, 2015. "Endogenous Uncertainty and Credit Crunches," TSE Working Papers 15-604, Toulouse School of Economics (TSE), revised Dec 2017.
    22. Scott R. Baker & Nicholas Bloom & Steven J. Davis, 2016. "Measuring Economic Policy Uncertainty," The Quarterly Journal of Economics, Oxford University Press, vol. 131(4), pages 1593-1636.
    23. Rotemberg, Julio J, 1982. "Sticky Prices in the United States," Journal of Political Economy, University of Chicago Press, vol. 90(6), pages 1187-1211, December.
    24. Gilboa, Itzhak & Schmeidler, David, 1989. "Maxmin expected utility with non-unique prior," Journal of Mathematical Economics, Elsevier, vol. 18(2), pages 141-153, April.
    25. George-Marios Angeletos & Alessandro Pavan, 2007. "Efficient Use of Information and Social Value of Information," Econometrica, Econometric Society, vol. 75(4), pages 1103-1142, July.
    26. Philippe Andrade & Gaetano Gaballo & Eric Mengus & Benoît Mojon, 2019. "Forward Guidance and Heterogeneous Beliefs," American Economic Journal: Macroeconomics, American Economic Association, vol. 11(3), pages 1-29, July.
    27. Matějka, Filip & Mackowiak, Bartosz & Wiederholt, Mirko, 2018. "Survey: Rational Inattention, a Disciplined Behavioral Model," CEPR Discussion Papers 13243, C.E.P.R. Discussion Papers.
    28. Virgiliu Midrigan, 2011. "Menu Costs, Multiproduct Firms, and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 79(4), pages 1139-1180, July.
    29. Backus, David & Ferriere, Axelle & Zin, Stanley, 2015. "Risk and ambiguity in models of business cycles," Journal of Monetary Economics, Elsevier, vol. 69(C), pages 42-63.
    30. Daniel Ellsberg, 1961. "Risk, Ambiguity, and the Savage Axioms," The Quarterly Journal of Economics, Oxford University Press, vol. 75(4), pages 643-669.
    31. Fabio Maccheroni & Massimo Marinacci & Aldo Rustichini, 2006. "Ambiguity Aversion, Robustness, and the Variational Representation of Preferences," Econometrica, Econometric Society, vol. 74(6), pages 1447-1498, November.
    32. Olivier Armantier & Wändi Bruine de Bruin & Giorgio Topa & Wilbert Klaauw & Basit Zafar, 2015. "Inflation Expectations And Behavior: Do Survey Respondents Act On Their Beliefs?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 56, pages 505-536, May.
    33. Gábor Kézdi & Robert J. Willis, 2011. "Household Stock Market Beliefs and Learning," NBER Working Papers 17614, National Bureau of Economic Research, Inc.
    34. Anmol Bhandari & Jaroslav Borovička & Paul Ho, 2016. "Identifying Ambiguity Shocks in Business Cycle Models Using Survey Data," NBER Working Papers 22225, National Bureau of Economic Research, Inc.
    35. Lee, Lung-Fei, 1983. "Generalized Econometric Models with Selectivity," Econometrica, Econometric Society, vol. 51(2), pages 507-512, March.
    36. Heckman, James, 2013. "Sample selection bias as a specification error," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 31(3), pages 129-137.
    37. Alp Simsek, 2013. "Belief Disagreements and Collateral Constraints," Econometrica, Econometric Society, vol. 81(1), pages 1-53, January.
    38. Judith A. Chevalier & Anil K. Kashyap & Peter E. Rossi, 2003. "Why Don't Prices Rise During Periods of Peak Demand? Evidence from Scanner Data," American Economic Review, American Economic Association, vol. 93(1), pages 15-37, March.
    39. Sims, Christopher A., 2003. "Implications of rational inattention," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 665-690, April.
    40. Michael D. Hurd, 2009. "Subjective Probabilities in Household Surveys," Annual Review of Economics, Annual Reviews, vol. 1(1), pages 543-564, May.
    41. Sims, Christopher A., 2010. "Rational Inattention and Monetary Economics," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 4, pages 155-181, Elsevier.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Dräger, Lena & Lamla, Michael J. & Pfajfar, Damjan, 2020. "The Hidden Heterogeneity of Inflation and Interest Rate Expectations: The Role of Preferences," Hannover Economic Papers (HEP) dp-666, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät, revised Feb 2023.
    2. repec:zbw:bofrdp:2022_005 is not listed on IDEAS
    3. Ambrocio, Gene, 2020. "Inflationary household uncertainty shocks," Research Discussion Papers 5/2020, Bank of Finland.
    4. Ambrocio, Gene, 2020. "Inflationary household uncertainty shocks," Bank of Finland Research Discussion Papers 5/2020, Bank of Finland.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Cosmin L. Ilut & Martin Schneider, 2022. "Modeling Uncertainty as Ambiguity: a Review," NBER Working Papers 29915, National Bureau of Economic Research, Inc.
    2. Claudio Michelacci & Luigi Paciello, 2020. "Ambiguous Policy Announcements," Review of Economic Studies, Oxford University Press, vol. 87(5), pages 2356-2398.
    3. Dräger, Lena & Lamla, Michael J. & Pfajfar, Damjan, 2020. "The Hidden Heterogeneity of Inflation and Interest Rate Expectations: The Role of Preferences," Hannover Economic Papers (HEP) dp-666, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät, revised Feb 2023.
    4. Andrade, Philippe & Gautier, Erwan & Mengus, Eric, 2023. "What matters in households’ inflation expectations?," Journal of Monetary Economics, Elsevier, vol. 138(C), pages 50-68.
    5. Massimo Guidolin & Francesca Rinaldi, 2013. "Ambiguity in asset pricing and portfolio choice: a review of the literature," Theory and Decision, Springer, vol. 74(2), pages 183-217, February.
    6. Cosmin Ilut & Rosen Valchev & Nicolas Vincent, 2020. "Paralyzed by Fear: Rigid and Discrete Pricing Under Demand Uncertainty," Econometrica, Econometric Society, vol. 88(5), pages 1899-1938, September.
    7. Ilut, Cosmin & Saijo, Hikaru, 2021. "Learning, confidence, and business cycles," Journal of Monetary Economics, Elsevier, vol. 117(C), pages 354-376.
    8. Ganguli, J & Condie, S & Illeditsch, PK, 2012. "Information Inertia," Economics Discussion Papers 5628, University of Essex, Department of Economics.
    9. Guangyu PEI, 2019. "Uncertainty, Pessimism and Economic Fluctuations," 2019 Meeting Papers 1494, Society for Economic Dynamics.
    10. repec:esx:essedp:770 is not listed on IDEAS
    11. Sumru Altug & Cem Cakmakli & Fabrice Collard & Sujoy Mukerji & Han Ozsoylev, 2020. "Ambiguous Business Cycles: A Quantitative Assessment," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 38, pages 220-237, October.
    12. George-Marios Angeletos, 2018. "Frictional Coordination," Journal of the European Economic Association, European Economic Association, vol. 16(3), pages 563-603.
    13. Baqaee, David Rezza, 2020. "Asymmetric inflation expectations, downward rigidity of wages, and asymmetric business cycles," Journal of Monetary Economics, Elsevier, vol. 114(C), pages 174-193.
    14. Jianjun Miao & Alejandro Rivera, 2016. "Robust Contracts in Continuous Time," Econometrica, Econometric Society, vol. 84, pages 1405-1440, July.
    15. Sumru Altug & Cem Cakmakli & Fabrice Collard & Sujoy Mukerji & Han Ozsoylev, 2020. "Ambiguous Business Cycles: A Quantitative Assessment," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 38, pages 220-237, October.
    16. Shi, Zhan, 2019. "Time-varying ambiguity, credit spreads, and the levered equity premium," Journal of Financial Economics, Elsevier, vol. 134(3), pages 617-646.
    17. Gumen, Anna & Savochkin, Andrei, 2013. "Dynamically stable preferences," Journal of Economic Theory, Elsevier, vol. 148(4), pages 1487-1508.
    18. repec:fip:a00001:89442 is not listed on IDEAS
    19. Eisei Ohtaki, 2023. "Optimality in an OLG model with nonsmooth preferences," International Journal of Economic Theory, The International Society for Economic Theory, vol. 19(3), pages 611-659, September.
    20. repec:esx:essedp:719 is not listed on IDEAS
    21. Illeditsch, PK & Ganguli, J & Condie, S, 2015. "Information Inertia," Economics Discussion Papers 15615, University of Essex, Department of Economics.
    22. Karni, Edi & Maccheroni, Fabio & Marinacci, Massimo, 2015. "Ambiguity and Nonexpected Utility," Handbook of Game Theory with Economic Applications,, Elsevier.
    23. Rhys Bidder & Ian Dew-Becker, 2016. "Long-Run Risk Is the Worst-Case Scenario," American Economic Review, American Economic Association, vol. 106(9), pages 2494-2527, September.

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eie:wpaper:2006. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Facundo Piguillem (email available below). General contact details of provider: https://edirc.repec.org/data/einauit.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.