Working Paper: NBER ID: w31504
Authors: Jingting Fan; Sungwan Hong; Fernando Parro
Abstract: The impact of shocks in dynamic environments depends on how forward-looking agents anticipate the path of future fundamentals that shape their decisions. We incorporate flexible beliefs about future fundamentals into a general class of dynamic spatial models, allowing beliefs to be evolving, uncertain, and heterogeneous across groups of agents. We show how to implement our methodology to study both ex-ante and ex-post shocks to fundamentals. We apply our method to two settings: an ex-ante study of the economic impacts of climate change, and an ex-post evaluation of the China productivity shock on the U.S. economy. In both cases, we study the impact of deviations from perfect foresight on different outcomes.
Keywords: dynamic spatial economies; beliefs; shocks; climate change; China productivity shock
JEL Codes: F1; F11; F16; F18; Q54; R11; R13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| agents' beliefs about future fundamentals (D84) | migration decisions (F22) |
| climate change is perfectly anticipated (Q54) | economic welfare (D69) |
| climate skeptics slow down spatial reallocation (Q54) | welfare for believers in the north and decreased welfare for individuals in the south (I39) |
| agents' initially held overly pessimistic beliefs about China's productivity (D24) | welfare gain due to China's productivity growth (O49) |