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Uncertainty: A diagrammatic treatment

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  • Dow, Sheila

Abstract

In spite of superficial similarities, the way in which uncertainty is understood as a feature of the crisis by mainstream economics is very different from Keynesian fundamental uncertainty. The difference stems from the mainstream habit of thinking in terms of a full-information benchmark, where uncertainty arises from ignorance. By treating uncertain knowledge as the norm, Keynesian uncertainty theory allows analysis of differing degrees of uncertainty and the cognitive role of institutions and conventions. The paper offers a simple diagrammatic representation of these differences, and uses this framework to depict different understandings of the crisis, its aftermath and the appropriate policy response.

Suggested Citation

  • Dow, Sheila, 2015. "Uncertainty: A diagrammatic treatment," Economics Discussion Papers 2015-36, Kiel Institute for the World Economy (IfW).
  • Handle: RePEc:zbw:ifwedp:201536
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    References listed on IDEAS

    as
    1. Dow Alexander & Dow Sheila C., 2011. "Animal Spirits Revisited," Capitalism and Society, De Gruyter, vol. 6(2), pages 1-25, December.
    2. Boyarchenko, Nina, 2012. "Ambiguity shifts and the 2007–2008 financial crisis," Journal of Monetary Economics, Elsevier, vol. 59(5), pages 493-507.
    3. Hansen, Lars-Peter & Sargent, Thomas-J, 2001. "Acknowledgement Misspecification in Macroeconomic Theory," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 19(S1), pages 213-227, February.
    4. Pablo D. Fajgelbaum & Edouard Schaal & Mathieu Taschereau-Dumouchel, 2017. "Uncertainty Traps," The Quarterly Journal of Economics, Oxford University Press, vol. 132(4), pages 1641-1692.
    5. Dow, Sheila C, 1990. "Beyond Dualism," Cambridge Journal of Economics, Oxford University Press, vol. 14(2), pages 143-157, June.
    6. Coddington, Alan, 1982. "Deficient Foresight: A Troublesome Theme in Keynesian Economics," American Economic Review, American Economic Association, vol. 72(3), pages 480-487, June.
    7. Camerer, Colin & Weber, Martin, 1992. "Recent Developments in Modeling Preferences: Uncertainty and Ambiguity," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 325-370, October.
    8. Orlik, Anna & Veldkamp, Laura, 2014. "Understanding Uncertainty Shocks and the Role of Black Swans," CEPR Discussion Papers 10147, C.E.P.R. Discussion Papers.
    9. Victoria Chick & Sheila Dow, 2005. "The meaning of open systems," Journal of Economic Methodology, Taylor & Francis Journals, vol. 12(3), pages 363-381.
    10. Lars Peter Hansen & Thomas J. Sargent, 2001. "Acknowledging Misspecification in Macroeconomic Theory," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 4(3), pages 519-535, July.
    11. David Dequech, 2000. "Fundamental Uncertainty and Ambiguity," Eastern Economic Journal, Eastern Economic Association, vol. 26(1), pages 41-60, Winter.
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    More about this item

    Keywords

    uncertainty; risk; ambiguity; Keynes;

    JEL classification:

    • B41 - Schools of Economic Thought and Methodology - - Economic Methodology - - - Economic Methodology
    • B5 - Schools of Economic Thought and Methodology - - Current Heterodox Approaches
    • E00 - Macroeconomics and Monetary Economics - - General - - - General
    • G01 - Financial Economics - - General - - - Financial Crises

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