Ambiguous Business Cycles: A Quantitative Assessment
Sumru Altug,
Cem Çakmaklı,
Fabrice Collard,
Sujoy Mukerji and
Han Ozsoylev
Review of Economic Dynamics, 2020, vol. 38, 220-237
Abstract:
In this paper, we examine the cyclical dynamics of a Real Business Cycle model with ambiguity averse consumers and investment irreversibility using the smooth ambiguity model of Klibanoff et al., 2005, Klibanoff et al., 2009. Ambiguity of belief about the productivity process arises as agents do not know the process driving variation in aggregate TFP, and they must make inferences regarding the true process at the same time as they infer the behavior of the unobserved temporary component using a Kalman filtering algorithm. Our findings may be summarized as follows. First, the standard business cycle facts hold in our framework, which are not altered significantly by changes in the degree of ambiguity aversion. Second, we demonstrate a role for information and learning effects, and show that lower initial ambiguity or greater confidence coupled with learning dynamics lowers the volatility and increases the persistence in all of the key macroeconomic variables. Third, comparing the performance of our model to the New Keynesian business cycle model of Ilut and Schneider (2014) with maxmin expected utility, we find that the version of their model without nominal and real frictions turns out to have limited success at matching the moments for the quantity variables. In the maxmin expected utility framework, the worst case scenario instills too much caution on the part of agents who, in the absence of a key set of nominal and real frictions, end up excessively reducing their responses to TFP shocks. (Copyright: Elsevier)
Keywords: Ambiguity; Ambiguity aversion; Information and learning; Investment irreversibility; Real Business Cycles; New Keynesian model (search for similar items in EconPapers)
JEL-codes: C6 D8 E2 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)
Downloads: (external link)
https://dx.doi.org/10.1016/j.red.2020.04.005
Access to full texts is restricted to ScienceDirect subscribers and institutional members. See https://www.sciencedirect.com/ for details.
Related works:
Software Item: Code and data files for "Ambiguous Business Cycles: A Quantitative Assessment" (2020) 
Working Paper: Ambiguous business cycles: a quantitative assessment (2020) 
Working Paper: Online Appendix to "Ambiguous Business Cycles: A Quantitative Assessment" (2020) 
Working Paper: Ambiguous Business Cycles: A Quantitative Assessment (2020) 
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:red:issued:19-269
Ordering information: This journal article can be ordered from
https://www.economic ... ription-information/
DOI: 10.1016/j.red.2020.04.005
Access Statistics for this article
Review of Economic Dynamics is currently edited by Loukas Karabarbounis
More articles in Review of Economic Dynamics from Elsevier for the Society for Economic Dynamics Contact information at EDIRC.
Bibliographic data for series maintained by Christian Zimmermann ().