Model Uncertainty as Partial-Identification Problems: Applications to Policy Promises during Crises

I present a general equilibrium model of intermediary asset pricing where investors are struggling with uncertainty represented by a set of models about future asset return distribution. Each model is consistent with observable information and the understanding of the economic structure but has different implications for return distribution. Confronting such uncertainty, investors fear models predicting low future returns, reducing asset demand due to uncertainty aversion and amplifying the risk premium, especially during crises when capital within the intermediation sector is scarce. Following validation of subjective beliefs by various survey expectations, I evaluate credible policy promises that eliminate some adverse models from investors’ set as inconsistent with announcements. I demonstrate the efficacy of announcements that eliminate pessimistic prospects for cash-flow growth and restore risk appetite. Methodologically, I develop agents’ inference framework from endogenous variables, where subjective beliefs and other equilibrium dynamics are jointly determined.