Risk and Ambiguity in Models of Business Cycles
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.
Prepared for the Carnegie-Rochester-NYU Conference, Rochester, April 2014. We thank Rudi Bachmann, Anmol Bhandari, Jarda Borovicka, Ana Fostel, Lars Hansen, Cosmin Ilut, Jianjun Miao, Laura Veldkamp, and Venky Vekateswaran for helpful comments. Chase Coleman and Spencer Lyon produced Figures 1-4. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Backus, David & Ferriere, Axelle & Zin, Stanley, 2015. "Risk and ambiguity in models of business cycles," Journal of Monetary Economics, Elsevier, vol. 69(C), pages 42-63. citation courtesy of