Faraway, So Close: Business Cycle Effect of Long-Run Ambiguity

Sara Biadetti (), Lorenzo Carbonari and Filippo Maurici ()
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Sara Biadetti: Università di Roma “Tor Vergata”, Italy
Filippo Maurici: Department of Political Sciences, Università Roma Tre, Italy

Working Paper series from Rimini Centre for Economic Analysis

Abstract: This paper explores forward-looking ambiguity (Knightian uncertainty) in a model with homogeneous workers and credit-constrained heterogeneous entrepreneurs. Agents are ambiguity-averse, using a worst-case criterion to form expectations about future productivity. We compare our economy with one that lacks uncertainty and find that ambiguity: (i) lowers the productivity threshold for market entry, (ii) reduces the equilibrium interest rate, and (iii) shifts expenditures from entrepreneurs to workers. These results stem from persistent expectation-realization mismatches. While ambiguity does not affect stability, it alters the convergence rate to the steady state and helps explain key macroeconomic comovements.

Keywords: ambiguity; collateral constraints; heterogeneous agents; transition dynamics (search for similar items in EconPapers)
JEL-codes: D81 D84 E22 G14 (search for similar items in EconPapers)
Date: 2024-12
New Economics Papers: this item is included in nep-dge, nep-ent, nep-eur and nep-upt
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Persistent link: https://EconPapers.repec.org/RePEc:rim:rimwps:24-20

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