Ambiguity, Low Risk-Free Rates and Consumption Inequality

Bibliographic Data

ID9719449
AuthorsYulei Luo (0000-0001-9467-4097, University of Hong Kong), Jun Nie (0000-0001-7939-381X, Federal Reserve Bank of Kansas City), Eric R Young (0000-0001-9703-4095, University of Virginia, and School of Economics, Zhejiang University)
Year2020
Volume130
Issue632
Pages2649-2679
Publication date2020-11-23
Peer ReviewedYes
Open AccessYes
TypeARTICLE
VenueThe Economic Journal (JOURNAL)
Journal identifiersISSN: 0013-0133 • E-ISSN: 1468-0297
PublisherOxford University Press (PUBLISHER • GB)
DOI10.1093/ej/ueaa045
OpenAlexW3017368555
LanguageEN
References cited37

Macroeconomists 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

Ambiguity · Consumption (sociology · Econometrics · Economics · General equilibrium theory · Great recession · Inequality · Keynesian economics · Macroeconomics · Microeconomics · Recession · Welfare · Computer Science · Economic theories and models · Economic Theory and Policy · Mathematics · Monetary Policy and Economic Impact

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