Ambiguous business cycles
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2014-01-01
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© 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.
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Ilut, CL, and M Schneider (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.
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Cosmin L. Ilut
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 optimal policy.
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