Ambiguous Business Cycles

Cosmin Ilut and Martin Schneider

No 12-06, Working Papers from Duke University, Department of Economics

Abstract: This 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 con fidence 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 confi dence about productivity works like `unrealized' bad news. Time-varying con fidence emerges as a major source of business cycle fluctuations.

Pages: 54
Date: 2012
New Economics Papers: this item is included in nep-bec, nep-dge, nep-mac and nep-upt
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Citations: View citations in EconPapers (20)

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Related works:
Journal Article: Ambiguous Business Cycles (2014)
Working Paper: Ambiguous Business Cycles (2012)
Working Paper: Ambiguous Business Cycles (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:duk:dukeec:12-06

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