Title:Ambiguity, Low Risk-Free Rates, and Consumption Inequality

Speaker:Dr. LUO Yulei

Time:1:55-3:25pm, May 4th, 2018

Venue:Yide Building H501

Abstract

The failure of macroeconomists to predict the Great Recession suggests possible misspecifications of existing macroeconomic models. If agents bear in mind such possible misspecifications, how will it alter their optimal decisions and how large are the welfare costs generated by such model uncertainty? To shed light on these questions, we develop a tractable continuous-time recursive utility (RU) version of the Huggett (1993) model to study the effects of model uncertainty due to a preference for robustness (RB, or ambiguity aversion) for the interest rate, the relative dispersion (inequality) of consumption and income, and the welfare costs in general equilibrium. We show that RB, through interacting with intertemporal substitution and risk aversion, reduces the equilibrium interest rate and the relative dispersion of consumption to income when the income process is stationary, but our benchmark model cannot match the observed relative dispersion. An extension to an RU-RB model with a risky asset is successful at matching this ratio. Our model suggests that a typical consumer in equilibrium would be willing to sacrifice about 12% of his initial income for a 10% reduction in the degree of model uncertainty.

Speaker's Information

Professor Yulei Luo is Associate Professor of Economics at The University of Hong Kong. Professor Luo obtained his PhD in Economics from Princeton University. The main research interests of Professor Luo are macroeconomics, household finance, and international finance. His research has been published in peer-reviewed journals including Journal of Economic Theory, Management Science, Journal of the European Economic Association, Journal of International Economics, American Economic Journal: Macroeconomics, Review of Economic Dynamics, Journal of Credit, Money and Banking, Journal of Economic Control and Dynamics, etc.