This paper investigates the effects of uncertainty on the macro economy by replicating its micro effects on individual subjective beliefs. In our model, the representative household has smooth ambiguity preferences and is uncertain about which scenario the economy will be in the next period:...

It would be easy to say that central banks should consider asset prices as one of the objectives to avoid boom and bust cycles, as happened in the 2007-2009 crisis; the dotcom bubble of 2001; and the Japanese boom and bust of the 1980s and 1990s. However, its implementation would be theoretically...