Research Publication

July 2012 | Article

Three Types of Ambiguity

Lars Peter Hansen, Thomas J. Sargent

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.

Journal: Journal of Monetary Economics|Volume: 59|Issue Number: 5|Pages: 422-445|Tags: Risk, Robustness and Ambiguity|Export BibTeX >
  title={Three Types of Ambiguity},
  author={Hansen, Lars Peter and Sargent, Thomas J.},
  journal={Journal of Monetary Economics},