Ambiguity Aversion and Heterogeneity in Households' Beliefs

Claudio Michelacci and Luigi Paciello

American Economic Journal: Macroeconomics, 2024, vol. 16, issue 2, 95-126

Abstract: UK households that wish for lower inflation and lower nominal interest rates have higher expected inflation. We interpret the evidence through the lens of a New Keynesian model where ambiguity-averse households differ in wealth, skill, labor market participation, and the receipt of government transfers and are subject to Knightian uncertainty. Households act based on beliefs that are negatively affected by their wishes, the more so the greater the amount of uncertainty. Using indirect inference, we find substantial output costs due to uncertainty. Monetary policy uncertainty contributes little to the costs because households generally dislike monetary expansions.

JEL-codes: D12 D81 D83 E12 E31 E43 E52 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1257/mac.20200141

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