Ambiguity Aversion and Heterogeneity in Households' Beliefs
American Economic Journal: Macroeconomics
vol. 16,
no. 2, April 2024
(pp. 95-126)
Abstract
UK households that wish for lower inflation and lower nominal interest rates have higher expected inflation. We interpret the evidence through the lens of a New Keynesian model where ambiguity-averse households differ in wealth, skill, labor market participation, and the receipt of government transfers and are subject to Knightian uncertainty. Households act based on beliefs that are negatively affected by their wishes, the more so the greater the amount of uncertainty. Using indirect inference, we find substantial output costs due to uncertainty. Monetary policy uncertainty contributes little to the costs because households generally dislike monetary expansions.Citation
Michelacci, Claudio, and Luigi Paciello. 2024. "Ambiguity Aversion and Heterogeneity in Households' Beliefs." American Economic Journal: Macroeconomics, 16 (2): 95-126. DOI: 10.1257/mac.20200141Additional Materials
JEL Classification
- D12 Consumer Economics: Empirical Analysis
- D81 Criteria for Decision-Making under Risk and Uncertainty
- D83 Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
- E12 General Aggregative Models: Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
- E31 Price Level; Inflation; Deflation
- E43 Interest Rates: Determination, Term Structure, and Effects
- E52 Monetary Policy
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