Ambiguous Business Cycles

Cosmin Ilut and Martin Schneider

No 17900, NBER Working Papers from National Bureau of Economic Research, Inc

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 confidence 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 confidence about productivity works like 'unrealized' bad news. Time-varying confidence emerges as a major source of business cycle fluctuations.

JEL-codes: E32 (search for similar items in EconPapers)
Date: 2012-03
New Economics Papers: this item is included in nep-dge, nep-mac and nep-upt
Note: EFG ME
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (26)

Published as \Ambiguous Business Cycles", with Martin Schneider, American Economic Review, forthcoming

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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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