Working Paper: NBER ID: w20807
Authors: Georgemarios Angeletos; Fabrice Collard; Harris Dellas
Abstract: We develop a tractable method for augmenting macroeconomic models with autonomous variation in higher-order beliefs. We use this to accommodate a certain type of waves of optimism and pessimism that can be interpreted as the product of frictional coordination and, unlike the one featured in the news literature, regards the short-term economic outlook rather than the medium- to long-run prospects. We show that this enrichment provides a parsimonious explanation of salient features of the data; it accounts for a significant fraction of the business-cycle volatility in estimated models that allow for various competing structural shocks; and it captures a type of fluctuations that have a Keynesian flavor but do not rely on nominal rigidities.
Keywords: Higher-order beliefs; Business cycles; Confidence shocks
JEL Codes: E0
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| negative confidence shock (D80) | firms become pessimistic about short-term profitability (D25) |
| firms become pessimistic about short-term profitability (D25) | firms reduce labor demand (J29) |
| firms reduce labor demand (J29) | decreased employment (J63) |
| decreased employment (J63) | decreased consumption (E21) |
| negative confidence shock (D80) | decreased employment (J63) |
| negative confidence shock (D80) | decreased consumption (E21) |
| negative confidence shock (D80) | strong positive comovement among employment, output, consumption, and investment (E27) |
| negative confidence shock (D80) | volatility in output (E39) |