Uncertainty Spillovers for Markets and Policy

31 Pages Posted: 4 Sep 2020

See all articles by Lars Peter Hansen

Lars Peter Hansen

University of Chicago - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: September 2, 2020

Abstract

We live in a world surrounded by uncertainty. In this essay, I show that featuring this phenomenon more in economic analyses adds to our understanding of how financial markets work and how best to design prudent economic policy. This essay explores methods that allow for a broader conceptualization of uncertainty than is typical in economic investigations. These methods draw on insights from decision theory to engage in uncertainty quantification and sensitivity analysis. Uncertainty quantification in economics differs from most sciences because there is uncertainty both from the perspective of an external observer and from people and enterprises within the model. I illustrate these methods in two example economies in which the understanding of long-term growth is limited. One example looks at uncertainty ramifications for fluctuations in financial markets, and the other considers the prudent design of policy when the quantitative magnitude of climate change and its impact on economic opportunities is unknown.

Keywords: uncertainty, valuation, financial markets, policy, climate change, ambiguity, misspeciļ¬cation

Suggested Citation

Hansen, Lars Peter, Uncertainty Spillovers for Markets and Policy (September 2, 2020). University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2020-121, Available at SSRN: https://ssrn.com/abstract=3686167 or http://dx.doi.org/10.2139/ssrn.3686167

Lars Peter Hansen (Contact Author)

University of Chicago - Department of Economics ( email )

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