Research / BFI Working PaperFeb 24, 2021

Uncertainty Spillovers for Markets and Policy

We live in a world filled with uncertainty. In this essay, I show that featuring this phenomenon more in economic analyses adds to our understanding of how financial markets work and how best to design prudent economic policy. This essay explores methods that allow for a broader conceptualization of uncertainty than is typical in economic investigations. These methods draw on insights from decision theory to engage in uncertainty quantification and sensitivity analysis. Uncertainty quantification in economics differs from most sciences because there is uncertainty both from the perspective of an external observer and from people and enterprises within the model. I illustrate these methods in two example economies in which the understanding of long-term growth is limited. One example looks at uncertainty ramifications for fluctuations in financial markets, and the other considers the prudent design of policy when the quantitative magnitude of climate change and its impact on economic opportunities is unknown.

Additional Materials

More Research From These Scholars

Journal Article Feb 14, 2020

Pricing Uncertainty Induced by Climate Change

Michael Barnett, William Brock, Lars Peter Hansen
Topics:  Energy & Environment
BFI Working Paper May 8, 2023

Debt Moratoria: Evidence from Student Loan Forbearance

Michael Dinerstein, Constantine Yannelis, Ching-Tse Chen
Topics:  Fiscal Studies, Higher Education & Workforce Training
BFI Working Paper Mar 17, 2022

Asset Pricing under Smooth Ambiguity in Continuous Time

Lars Peter Hansen, Jianjun Miao
Topics:  Financial Markets