Ambiguous business cycles

Here is a new paper by Cosmin L. Ilut and Martin Schneider on how ambiguity aversion can give rise to a kind of real business cycle, augmented by nominal rigidities:

This paper studies a New Keynesian business cycle model with agents who are averse to ambiguity (Knightian uncertainty). Shocks to confidence about future TFP are modeled as changes in ambiguity. To assess the size of those shocks, our estimation uses not only data on standard macro variables, but also incorporates the dispersion of survey forecasts about growth as a measure of confidence. Our main result is that TFP and confidence shocks together can explain roughly two thirds of business cycle frequency movements in the major macro aggregates. Confidence shocks account for about 70% of this variation.

The AER version is here, there are various versions here.

By Kristoffer P. Nimark, here is a paper on “Man bites Dog” business cycles.

Comments

I have no expertise in this area, but in my lust to be first and offer a substantive comment I have quickly read the paper, and the excellent "man bites dog" article, and it seems this is a "Real Business Cycle" sleight of hand article, that attempts to show small changes in sentiment yield large changes in GDP. For example (to cite an extreme example): "What caused the Black Friday drop in the stock market in 1987, that eventually produced a corresponding 'wealth effect' negative change in GDP (though not, as was feared at the time, a recession)"? Answer according to this school: Congress mulling over some obscure tax changes that would hurt business. If you believe in this kind of cause-effect, which attempts to eliminate Keynes' animal spirits, I own the Brooklyn bridge.

"I have no expertise in this area"

That is abundantly clear.

The business cycle has already been explained here:
http://www.kc.frb.org/publicat/sympos/2007/pdf/leamer_0415.pdf

"Housing is the Business Cycle" by E. Leamer? Sounds crackpot. But given Piketty's data maybe in the Great Stagnation society in which we live, maybe not so crackpot after all.

Solar cycles, weather cycles, climate cycles, drought cycles, political cycles, fashion cycles......everything recorded in economics, including the central bank's policy, are expressions of the underlying cycle, not the cause of it.

The underlying cycle is the menstrual cycle.

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