Bias and Sensitivity under Ambiguity

Zhen Huo, Marcelo Pedroni and Guangyu Pei

American Economic Review, 2024, vol. 114, issue 12, 4091-4133

Abstract: This paper characterizes the effects of ambiguity aversion under dispersed information. The equilibrium outcome is observationally equivalent to a Bayesian forecast of the fundamental with increased sensitivity to signals and a pessimistic bias. This equivalence result takes a simple form that accommodates dynamic information and strategic interactions. Applying the result, we show that ambiguity aversion helps rationalize the joint empirical pattern between the bias and persistence of inflation forecasts conditional on household income. In a policy game à la Barro and Gordon (1983) with ambiguity-averse agents, the policy rule features higher average inflation and increased responsiveness to fundamentals.

JEL-codes: D81 D83 E31 E37 E71 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1257/aer.20231012

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