Abstract :
In arealbusinesscyclemodel,anagent’sfearofmodelmisspecificationinteractswith
stochasticvolatilitytoinducetimevaryingworstcasescenarios.Thesetimevaryingworst
casescenarioscaptureanotionofanimalspiritswheretheprobabilitydistributionsusedto
evaluatedecisionrulesandpriceassetsdonotnecessarilyreflectthefundamental
characteristics oftheeconomy.Householdsentertainapessimisticviewoftheworldand
theirpessimismvarieswiththeoveralllevelofvolatilityintheeconomy,implyingan
amplificationoftheeffectsofvolatilityshocks.ByusingperturbationmethodsandMonte
Carlotechniquesweextendtheclassofmodelsanalyzedwithrobustcontrolmethodsto
includethesortofnonlinearproduction-basedDSGEmodelsthatarepopularinacademic
researchandpolicymakingpractice
