State-space models have been increasingly used to study macroeconomic and financial problems. A state-space representation consists of two equations, a measurement equation which links the observed variables to unobserved state variables and a transition equation describing the dynamics of the...

We propose a production-cost smoothing model with Knightian uncertainty and ambiguityaversion to study the joint behavior of production, inventories, and sales. Our model canexplain four facts that previous studies find difficult to account for simultaneously: (i) the highvolatility of...