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Working Paper
Understanding Uncertainty Shocks and the Role of Black Swans
Economic uncertainty is a powerful force in the modern economy. Research shows that surges in uncertainty can trigger business cycles, bank runs and asset price fluctuations. But where do sudden surges in uncertainty come from? This paper provides a data-disciplined theory of belief formation that explains large fluctuations in uncertainty. It argues that people do not know the true distribution of macroeconomic outcomes. Like Bayesian econometricians, they estimate a distribution. Our main contribution is to explain why real-time estimation of distributions with non-normal tails results in ...
Working Paper
Attention Allocation and Belief Distortions
Using microdata from the Michigan Survey of Consumers, we study how within-household reallocations of attention across news affect inflation expectation bias, measured relative to a real-time, machine-learning full-information benchmark. Shifting attention toward unfavorable (favorable) economic news increases (decreases) forecast bias substantially, while dropping attention to an unfavorable topic has little effect. The largest bias increases come not from inflation news itself, but from attention to unfavorable social, political, and geopolitical narratives. Aggregate news sentiment has no ...