QUANTIFYING CONFIDENCE

doi:10.3982/ECTA13079

QUANTIFYING CONFIDENCE

2018-01-01

87

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AI

G

George-Marios Angeletos *

DOI：10.3982/ECTA13079

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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.

Keyword:

Higher-order uncertainty

coordination failure

aggregate demand

sentiments

business cycles

QUANTIFYING CONFIDENCE

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