Huo, Z., Pedroni, M. and Pei, G. (2024). Bias and Sensitivity under Ambiguity American Economic Review, 114(12):4091--4133.
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Affiliated author
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Publication year2024
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JournalAmerican Economic Review
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.