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Article: Ambiguity, Low Risk-Free Rates, and Consumption Inequality

TitleAmbiguity, Low Risk-Free Rates, and Consumption Inequality
Authors
KeywordsC61 - Optimization Techniques
Programming Models
Dynamic Analysis
D81 - Criteria for Decision-Making under Risk and Uncertainty
E21 - Consumption
Issue Date2020
PublisherWiley for Royal Economic Society. The Journal's web site is located at http://onlinelibrary.wiley.com/journal/10.1111/(ISSN)1468-0297
Citation
The Economic Journal, 2020, Epub 2020-04-17 How to Cite?
AbstractMacroeconomists failed to predict the Great Recession, suggesting that the existing macroeconomic models may have been misspecified. Bearing in mind this potential misspecification or “model uncertainty,” how do agents’ optimal decisions change? Furthermore, how large are the welfare costs of model misspecification? To shed light on these questions, we develop a tractable continuous-time general equilibrium model to show that a fear of model misspecification reduces both the equilibrium interest rate and the relative inequality of consumption to income, making the model’s predictions closer to the data. Our quantitative analysis shows that the welfare costs of model uncertainty are sizable.
Persistent Identifierhttp://hdl.handle.net/10722/282481
ISSN
2017 Impact Factor: 2.946
2015 SCImago Journal Rankings: 3.390

 

DC FieldValueLanguage
dc.contributor.authorLuo, Y-
dc.contributor.authorNie, J-
dc.contributor.authorYoung, ER-
dc.date.accessioned2020-05-15T05:28:41Z-
dc.date.available2020-05-15T05:28:41Z-
dc.date.issued2020-
dc.identifier.citationThe Economic Journal, 2020, Epub 2020-04-17-
dc.identifier.issn0013-0133-
dc.identifier.urihttp://hdl.handle.net/10722/282481-
dc.description.abstractMacroeconomists failed to predict the Great Recession, suggesting that the existing macroeconomic models may have been misspecified. Bearing in mind this potential misspecification or “model uncertainty,” how do agents’ optimal decisions change? Furthermore, how large are the welfare costs of model misspecification? To shed light on these questions, we develop a tractable continuous-time general equilibrium model to show that a fear of model misspecification reduces both the equilibrium interest rate and the relative inequality of consumption to income, making the model’s predictions closer to the data. Our quantitative analysis shows that the welfare costs of model uncertainty are sizable.-
dc.languageeng-
dc.publisherWiley for Royal Economic Society. The Journal's web site is located at http://onlinelibrary.wiley.com/journal/10.1111/(ISSN)1468-0297-
dc.relation.ispartofThe Economic Journal-
dc.subjectC61 - Optimization Techniques-
dc.subjectProgramming Models-
dc.subjectDynamic Analysis-
dc.subjectD81 - Criteria for Decision-Making under Risk and Uncertainty-
dc.subjectE21 - Consumption-
dc.titleAmbiguity, Low Risk-Free Rates, and Consumption Inequality-
dc.typeArticle-
dc.identifier.emailLuo, Y: yluo@econ.hku.hk-
dc.identifier.authorityLuo, Y=rp01083-
dc.description.naturelink_to_subscribed_fulltext-
dc.identifier.doi10.1093/ej/ueaa045-
dc.identifier.hkuros309872-
dc.identifier.volumeEpub 2020-04-17-
dc.publisher.placeUnited Kingdom-

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