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Working Paper Series
Modeling the Evolution of Expectations and Uncertainty in General Equilibrium
We develop methods to solve general equilibrium models in which forward-looking agents are subject to waves of pessimism, optimism, and uncertainty that turn out to critically affect macroeconomic outcomes. Agents in the model are fully rational, conduct Bayesian learning, and they know that they do not know. Therefore, agents take into account that their beliefs will evolve according to what they will observe. This framework accommodates both gradual and abrupt changes in beliefs and allows for an analytical characterization of uncertainty. Shocks to beliefs affect economic dynamics and uncertainty. We use a prototypical Real Business Cycle to illustrate the methods.
Cite this item
Francesco Bianchi & Leonardo Melosi, Modeling the Evolution of Expectations and Uncertainty in General Equilibrium, Federal Reserve Bank of Chicago, Working Paper Series WP-2013-12, 01 Sep 2013.
- C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
- D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
- E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
Keywords: Markov switching; general equilibrium models; uncertainty; Bayesian learning; rational expectations; downside risk; rare disasters
This item with handle RePEc:fip:fedhwp:wp-2013-12
is also listed on EconPapers
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