Three types of ambiguity

Lars Peter Hansen, Thomas J. Sargent

    Research output: Contribution to journalArticle

    Abstract

    For each of three types of ambiguity, we compute a robust Ramsey plan and an associated worst-case probability model. Ex post, ambiguity of type I implies endogenously distorted homogeneous beliefs, while ambiguities of types II and III imply distorted heterogeneous beliefs. Martingales characterize alternative probability specifications and clarify distinctions among the three types of ambiguity. We use recursive formulations of Ramsey problems to impose local predictability of commitment multipliers directly. To reduce the dimension of the state in a recursive formulation, we transform the commitment multiplier to accommodate the heterogeneous beliefs that arise with ambiguity of types II and III. Our formulations facilitate comparisons of the consequences of these alternative types of ambiguity.

    Original languageEnglish (US)
    Pages (from-to)422-445
    Number of pages24
    JournalJournal of Monetary Economics
    Volume59
    Issue number5
    DOIs
    StatePublished - Jul 2012

    ASJC Scopus subject areas

    • Finance
    • Economics and Econometrics

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