Identifying Ambiguity Shocks in Business Cycle Models Using Survey Data

59 Pages Posted: 9 May 2016

See all articles by Anmol Bhandari

Anmol Bhandari

University of Minnesota - Minneapolis - Department of Economics

Jaroslav Borovička

New York University (NYU) - Department of Economics; National Bureau of Economic Research (NBER)

Paul Ho

Federal Reserve Banks - Federal Reserve Bank of Richmond

Multiple version iconThere are 2 versions of this paper

Date Written: May 2016

Abstract

We develop a framework to analyze economies with agents facing time-varying concerns for model misspecification. These concerns lead agents to interpret economic outcomes and make decisions through the lens of a pessimistically biased 'worst-case' model. We combine survey data and implied theoretical restrictions on the relative magnitudes and comovement of forecast biases across macroeconomic variables to identify ambiguity shocks as exogenous fluctuations in the worst-case model. Our solution method delivers tractable linear approximations that preserve the effects of time-varying ambiguity concerns and permit estimation using standard Bayesian techniques. Applying our framework to an estimated New-Keynesian business cycle model with frictional labor markets, we find that ambiguity shocks explain a substantial portion of the variation in labor market quantities.

Suggested Citation

Bhandari, Anmol and Borovička, Jaroslav and Ho, Paul, Identifying Ambiguity Shocks in Business Cycle Models Using Survey Data (May 2016). NBER Working Paper No. w22225. Available at SSRN: https://ssrn.com/abstract=2777313

Anmol Bhandari (Contact Author)

University of Minnesota - Minneapolis - Department of Economics ( email )

1925 Fourth Street South
Minneapolis, MN
United States

Jaroslav Borovička

New York University (NYU) - Department of Economics ( email )

19 W 4th Street, 6th floor
New York, NY 10012
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Paul Ho

Federal Reserve Banks - Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
9
Abstract Views
165
PlumX Metrics