Ambiguous business cycles
Abstract
© 2014 by the American Economic Association.This paper studies a New Keynesian business
cycle model with agents who are averse to ambiguity (Knightian uncertainty). Shocks
to confidence about future TFP are modeled as changes in ambiguity. To assess the
size of those shocks, our estimation uses not only data on standard macro variables,
but also incorporates the dispersion of survey forecasts about growth as a measure
of confidence. Our main result is that TFP and confidence shocks together can explain
roughly two thirds of business cycle frequency movements in the major macro aggregates.
Confidence shocks account for about 70 percent of this variation.
Type
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https://hdl.handle.net/10161/13091Published Version (Please cite this version)
10.1257/aer.104.8.2368Publication Info
Ilut, CL; & Schneider, M (2014). Ambiguous business cycles. American Economic Review, 104(8). pp. 2368-2399. 10.1257/aer.104.8.2368. Retrieved from https://hdl.handle.net/10161/13091.This is constructed from limited available data and may be imprecise. To cite this
article, please review & use the official citation provided by the journal.
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Show full item recordScholars@Duke
Cosmin L. Ilut
Professor of Economics
Professor Ilut’s major fields of interest are macroeconomics, international finance,
asset pricing, and economics of information. Specifically, he focuses on the role
of expectations and how agents incorporate information. He is currently focusing on
settings in which agents face model uncertainty. Based on decision theoretical foundations
(ambiguity aversion), he studies the role of such uncertainties for understanding
macroeconomic issues like business cycle fluctuations, asset pricing and opt

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