Time-varying ambiguity shocks and business cycles

Takao Asano (), Xiaojing Cai () and Ryuta Sakemoto
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Takao Asano: Okayama University
Xiaojing Cai: Okayama University

No 1094, KIER Working Papers from Kyoto University, Institute of Economic Research

Abstract: This study investigates how ambiguity has driven output and inflation in the U.S. over the past 70 years. We adopt the recently developed techniques that disentangle ambiguity from risk and assess the responses of output and inflation to ambiguity shocks. We observe that an increase in ambiguity led to an increase in output during high inflation periods, indicating the ambiguity lover behavior. We also uncover that ambiguity and risk estimated by realized volatility have the opposite impacts on business cycles, which is consistent with the prevailing asset pricing literature.

Keywords: Ambiguity; Risk premiums; Uncertainty; TVP-VAR (search for similar items in EconPapers)
JEL-codes: E32 E44 (search for similar items in EconPapers)
Pages: 47pages
Date: 2023-08
New Economics Papers: this item is included in nep-rmg and nep-upt
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Persistent link: https://EconPapers.repec.org/RePEc:kyo:wpaper:1094

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