Federal Reserve Bank of Richmond
701 East Byrd Street
Richmond, VA 23219
Institutional Affiliation: Federal Reserve Bank of Richmond
NBER Working Papers and Publications
|May 2016||Identifying Ambiguity Shocks in Business Cycle Models Using Survey Data|
with Anmol Bhandari, Jaroslav Borovička: w22225
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 shock...