NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Risk and Ambiguity in Models of Business Cycles

David Backus, Axelle Ferriere, Stanley Zin

NBER Working Paper No. 20319
Issued in July 2014
NBER Program(s):   AP   EFG

We inject aggregate uncertainty – risk and ambiguity – into an otherwise standard business cycle model and describe its consequences. We find that increases in uncertainty generally reduce consumption, but they do not account, in this model, for either the magnitude or the persistence of the most recent recession. We speculate about extensions that might do better along one or both dimensions.

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Document Object Identifier (DOI): 10.3386/w20319

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