Search Results
Briefing
Macroeconomic Effects of Household Pessimism and Optimism
Survey data on households' expectations about macroeconomic outcomes reveal systematic differences from statistical (or rational) forecasts. We construct an empirical measure of these differences, which we refer to as "belief wedges." Across economic variables, such as inflation and unemployment, these belief wedges are significant and move in parallel with the business cycle. We present a theory of time-varying belief wedges that accounts for these empirical facts. Our theory provides a formal interpretation of these wedges as pessimism and optimism. Embedding the theory into a quantitative ...
Working Paper
Survey Data and Subjective Beliefs in Business Cycle Models
This paper develops a theory of subjective beliefs that departs from rational expectations, and shows that biases in household beliefs have quantitatively large effects on macroeconomic aggregates. The departures are formalized using model-consistent notions of pessimism and optimism and are disciplined by data on household forecasts. The role of subjective beliefs is quantified in a business cycle model with goods and labor market frictions. Consistent with the survey evidence, an increase in pessimism generates upward biases in unemployment and inflation forecasts and lowers economic ...
Working Paper
Survival and long-run dynamics with heterogeneous beliefs under recursive preferences
I study the long-run behavior of a two-agent economy where agents differ in their beliefs and are endowed with homothetic recursive preferences of the Duffie-Epstein-Zin type. When preferences are separable, the economy is dominated in the long run by the agent whose beliefs are relatively more precise, a result consistent with the market selection hypothesis. However, recursive preference specifications lead to equilibria in which both agents survive, or to ones where either agent can dominate the economy with a strictly positive probability. In this respect, the market selection hypothesis ...
Working Paper
Examining macroeconomic models through the lens of asset pricing
Dynamic stochastic equilibrium models of the macro economy are designed to match the macro time series including impulse response functions. Since these models aim to be structural, they also have implications for asset pricing. To assess these implications, we explore asset pricing counterparts to impulse response functions. We use the resulting dynamic value decomposition (DVD) methods to quantify the exposures of macroeconomic cash flows to shocks over alternative investment horizons and the corresponding prices or compensations that investors must receive because of the exposure to such ...