Model uncertainty and wealth distribution / by Edouard Djeutem and Shaofeng Xu.: FB3-5/2019-48E-PDF

"This paper studies the implications of model uncertainty for wealth distribution in a tractable general equilibrium model with a borrowing constraint and robustness à la Hansen and Sargent (2008). Households confront model uncertainty about the process driving the return of the risky asset, and they choose robust policies. We find that in the presence of a borrowing constraint, model distortion varies non-monotonically with wealth. Robustness generates two forces that amplify wealth inequality. On the one hand, it increases the speed at which the wealth of unlucky households hits the borrowing constraint. On the other hand, it leads richer households to invest a disproportionately larger share of wealth in the higher yielding asset. Our study also shows that model uncertainty results in an aggregate welfare loss unevenly distributed across households"--Abstract.

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Publication information
Department/Agency Bank of Canada.
Title Model uncertainty and wealth distribution / by Edouard Djeutem and Shaofeng Xu.
Series title Bank of Canada staff working paper, 1701-9397 ; 2019-48
Publication type Series - View Master Record
Language [English]
Format Electronic
Electronic document
Note(s) "December 2019."
Includes bibliographical references (pages 18-19).
Includes abstract in French.
Publishing information [Ottawa] : Bank of Canada, 2019.
©2019
Author / Contributor Djeutem, Edouard.
Description 1 online resource (iii, 33 pages)
Catalogue number
  • FB3-5/2019-48E-PDF
Subject terms Distribution (Economic theory)
Uncertainty -- Mathematical models.
Distribution (Économie politique)
Incertitude -- Modèles mathématiques.
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