Risk and Ambiguity in Models of Business Cycles
48 Pages Posted: 24 Jul 2014
Date Written: July 2014
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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