Three types of ambiguity

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...

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Bibliographic Details
Published in:Journal of monetary economics 2012-07, Vol.59 (5), p.422-445
Main Authors: Hansen, Lars Peter, Sargent, Thomas J.
Format: Article
Language:English
Subjects:
Ambiguity
Belief & doubt
Beliefs
Economic models
Mathematical methods
Monetary economics
Monetary policy
Monopolies
Multiplier
Price policy
Probability
Social welfare
Specifications
Stochastic models
Studies
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Summary: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. ► We study Ramsey problems in which a planner confronts three types of ambiguity when designing economic policy rules. ► We use martingales to characterize alternative probability specifications and to specify formally three types of ambiguity. ► We adopt recursive formulations for three related commitment problems in which a Ramsey planner seeks to be robust.
ISSN:0304-3932
1873-1295
DOI:10.1016/j.jmoneco.2012.06.003