Risk and ambiguity in models of business cycles |
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| Affiliation: | 1. University of Notre Dame, CEPR, and CESifo, United States;2. Frankfurt School of Finance and Management, CEPR, and CESifo, Germany;3. RWI - Leibniz Institute for Economic Research, Germany;4. ifo Institute - Leibniz Institute for Economic Research at the University of Munich, Germany |
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| Abstract: | 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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| Keywords: | Uncertainty Smooth ambiguity Certainty equivalent Recursive preferences Pricing kernel Asset returns Learning |
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