American Economic Review
ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)
Bias and Sensitivity under Ambiguity
American Economic Review
vol. 114,
no. 12, December 2024
(pp. 4091–4133)
Abstract
This paper characterizes the effects of ambiguity aversion under dispersed information. The equilibrium outcome is observationally equivalent to a Bayesian forecast of the fundamental with increased sensitivity to signals and a pessimistic bias. This equivalence result takes a simple form that accommodates dynamic information and strategic interactions. Applying the result, we show that ambiguity aversion helps rationalize the joint empirical pattern between the bias and persistence of inflation forecasts conditional on household income. In a policy game à la Barro and Gordon (1983) with ambiguity-averse agents, the policy rule features higher average inflation and increased responsiveness to fundamentals.Citation
Huo, Zhen, Marcelo Pedroni, and Guangyu Pei. 2024. "Bias and Sensitivity under Ambiguity." American Economic Review, 114 (12): 4091–4133. DOI: 10.1257/aer.20231012Additional Materials
JEL Classification
- D81 Criteria for Decision-Making under Risk and Uncertainty
- D83 Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
- E31 Price Level; Inflation; Deflation
- E37 Prices, Business Fluctuations, and Cycles: Forecasting and Simulation: Models and Applications
- E71 Macro-Based Behavioral Economics: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on the Macro Economy