Ambiguity, News, Noise, and Fluctuations

Abstract:

This paper links the news and noise information structure of Blanchard, L’Huillier, and Lorenzoni (2013) to second moment effects by means of ambiguity aversion to the precision of information. Specifically, when agents receive ambiguous signals about permanent productivity, consumption features asymmetric responses: the size of the response depends on whether the signal delivers good or bad news. Agents’ beliefs updating and consumption under ambiguous signals, as well as econometrician’s filtering problem are discussed. The model is estimated through maximum likelihood.