Ambiguous Business Cycles / Cosmin Ilut, Martin Schneider.

Format:

Book

Author/Creator:

Ilut, Cosmin.

Contributor:

National Bureau of Economic Research.

Schneider, Martin.

Series:

Working Paper Series (National Bureau of Economic Research) no. w17900.

NBER working paper series no. w17900

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2012.

Summary:

This paper considers business cycle models with agents who dislike both risk and ambiguity (Knightian uncertainty). Ambiguity aversion is described by recursive multiple priors preferences that capture agents' lack of confidence in probability assessments. While modeling changes in risk typically requires higher-order approximations, changes in ambiguity in our models work like changes in conditional means. Our models thus allow for uncertainty shocks but can still be solved and estimated using first-order approximations. In our estimated medium-scale DSGE model, a loss of confidence about productivity works like 'unrealized' bad news. Time-varying confidence emerges as a major source of business cycle fluctuations.

Notes:

Print version record

March 2012.