Bias and Sensitivity under Ambiguity
Zhen Huo, Marcelo Pedroni, Guangyu Pei
American Economic Review · 2024 · Volume 114 · Issue 12
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.
Keywords
Criteria for Decision-Making under Risk and Uncertainty, Search, Learning, Information and Knowledge, Communication, Belief, Unawareness, Price Level, Inflation, Deflation, Prices, Business Fluctuations, and Cycles: Forecasting and Simulation: Models and Applications, Macro-Based Behavioral Economics: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on the Macro Economy
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