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American Economic Review Vol. 114 No. 12 2024

Bias and Sensitivity under Ambiguity

Zhen Huo1; Marcelo Pedroni2; Guangyu Pei3

1 Department of Economics, Yale University (email: ) · 2 Department of Economics, University of Amsterdam and Tinbergen Institute (email: ) · 3 Department of Economics, The Chinese University of Hong Kong (email: )

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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.

DOI
10.1257/aer.20231012
Volume
114
Issue
12
Pages
4091-4133
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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