Risk and Ambiguity in Models of Business Cycles

NBER Working Paper No. 20319

Issued in July 2014

NBER Program(s):Asset Pricing, Economic Fluctuations and Growth



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.

Acknowledgments

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Document Object Identifier (DOI): 10.3386/w20319

Published: 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

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