Identifying Ambiguity Shocks in Business Cycle Models Using Survey Data / Anmol Bhandari, Jaroslav Borovička, Paul Ho.

Format:

Book

Author/Creator:

Bhandari, Anmol.

Contributor:

National Bureau of Economic Research.

Borovička, Jaroslav.

Ho, Paul.

Series:

Working Paper Series (National Bureau of Economic Research) no. w22225.

NBER working paper series no. w22225

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2016.

Summary:

We develop a framework to analyze economies with agents facing time-varying concerns for model misspecification. These concerns lead agents to interpret economic outcomes and make decisions through the lens of a pessimistically biased 'worst-case' model. We combine survey data and implied theoretical restrictions on the relative magnitudes and comovement of forecast biases across macroeconomic variables to identify ambiguity shocks as exogenous fluctuations in the worst-case model. Our solution method delivers tractable linear approximations that preserve the effects of time-varying ambiguity concerns and permit estimation using standard Bayesian techniques. Applying our framework to an estimated New-Keynesian business cycle model with frictional labor markets, we find that ambiguity shocks explain a substantial portion of the variation in labor market quantities.

Notes:

Print version record

May 2016.