Skip to main content Accessibility help
×
Home
Hostname: page-component-99c86f546-n7x5d Total loading time: 0.187 Render date: 2021-11-29T00:54:31.778Z Has data issue: true Feature Flags: { "shouldUseShareProductTool": true, "shouldUseHypothesis": true, "isUnsiloEnabled": true, "metricsAbstractViews": false, "figures": true, "newCiteModal": false, "newCitedByModal": true, "newEcommerce": true, "newUsageEvents": true }

BELIEF-TWISTING SHOCKS AND THE MACROECONOMY

Published online by Cambridge University Press:  19 February 2018

Jacek Suda*
Affiliation:
Narodowy Bank Polski and Warsaw School of Economics
*
Address correspondence to: Jacek Suda, Narodowy Bank Polski, Świȩtokrzyska 11/21, 00-919 Warsaw, Poland; e-mail: jacek.suda@nbp.pl.

Abstract

I study the role of shocks to beliefs combined with Bayesian learning in a standard equilibrium business cycle framework. In particular, I examine how a prior belief arising from the Great Depression may have influenced the macroeconomy during the last 75 years. In the model, households hold twisted beliefs concerning the likelihood and persistence of recession and boom states that are affected by the Great Depression. These initial beliefs are substantially different from the true data generating process and are only gradually unwound during subsequent years. Even though the driving stochastic process for technology is unchanged over the entire period, the nature of macroeconomic performance is altered considerably for many decades before eventually converging to the rational expectations equilibrium. This provides some evidence of the lingering effects of beliefs-twisting events on the behavior of macroeconomic variables.

Type
Articles
Copyright
Copyright © Cambridge University Press 2018 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

I especially thank James Bullard for support and very valuable discussions and suggestions. I also thank Klaus Adam, Costas Azariadis, James Morley, Albert Marcet, and Gabriela Nodari for their comments and suggestions and to participants at AEA Meeting, Econometric Society World Congress in Shanghai, International Workshop on Financial Markets and Nonlinear Dynamics, and many other conferences and seminars for comments. All errors are my own.

References

Aruoba, S. B., Fernandez-Villaverde, J., and Rubio-Ramirez, J. F. (2006) Comparing solution methods for dynamic equilibrium economies. Journal of Economic Dynamics and Control 30 (12), 24772508.CrossRefGoogle Scholar
Barro, R. J. (2006) Rare disasters and asset markets in the twentieth century. Quarterly Journal of Economics 121 (3), 823866.CrossRefGoogle Scholar
Bullard, J. B. and Singh, A. (2012) Learning and the great moderation. International Economic Review 53, 375397.CrossRefGoogle Scholar
Bullard, J. B. and Suda, J. (2016) Stability theorems for macroeconomic systems with Bayesian learners. Journal of Economic Dynamics and Control 62, 126.CrossRefGoogle Scholar
Cecchetti, S. G., Lam, P.-S., and Mark, N. C. (2000) Asset pricing with distorted beliefs: Are equity returns too good to be true? American Economic Review 90 (4), 787805.CrossRefGoogle Scholar
Cogley, T. and Sargent, T. J. (2008a) Anticipated utility and rational expectations as approximations of Bayesian decision making. International Economic Review 49 (1), 185221.CrossRefGoogle Scholar
Cogley, T. and Sargent, T. J. (2008b) The market price of risk and the equity premium: A legacy of the great depression? Journal of Monetary Economics 55 (3), 454476.CrossRefGoogle Scholar
Danthine, J.-P. and Donaldson, J. B. (1999) Non-falsified expectations and general equilibrium asset pricing: The power of the peso. Economic Journal 109 (458), 607635.CrossRefGoogle Scholar
Eusepi, S. and Preston, B. (2011) Expectations, learning and business cycle fluctuations. American Economic Review 101 (6), 2844–72.CrossRefGoogle Scholar
Friedman, M. and Schwartz, A. J. (1963) Monetary History of the United States, 1867–1960. Princeton, NJ: Princeton University Press.Google Scholar
Malmendier, U. and Nagel, S. (2011) Depression babies: Do macroeconomic experiences affect risk-taking? Quarterly Journal of Economics 126 (1), 373416.CrossRefGoogle Scholar
Malmendier, U. and Nagel, S. (2016) Learning from inflation experiences. Quarterly Journal of Economics 131 (1), 5387.CrossRefGoogle Scholar
Modigliani, F. (1986) Life cycle, individual thrift, and the wealth of nations. American Economic Review 76 (3), 297313.Google Scholar
Pintus, P. and Suda, J. (2013) Learning Financial Shocks and the Great Recession. Working paper 2013-33, Aix-Marseille School of Economics.Google Scholar
Suda, J. (2018) Beliefs Shock and the Macroeconomy. Working paper, Narodowy Bank Polski.Google Scholar
Weitzman, M. L. (2007) Subjective expectations and asset-return puzzles. American Economic Review 97 (4), 11021130.CrossRefGoogle Scholar

Send article to Kindle

To send this article to your Kindle, first ensure no-reply@cambridge.org is added to your Approved Personal Document E-mail List under your Personal Document Settings on the Manage Your Content and Devices page of your Amazon account. Then enter the ‘name’ part of your Kindle email address below. Find out more about sending to your Kindle. Find out more about sending to your Kindle.

Note you can select to send to either the @free.kindle.com or @kindle.com variations. ‘@free.kindle.com’ emails are free but can only be sent to your device when it is connected to wi-fi. ‘@kindle.com’ emails can be delivered even when you are not connected to wi-fi, but note that service fees apply.

Find out more about the Kindle Personal Document Service.

BELIEF-TWISTING SHOCKS AND THE MACROECONOMY
Available formats
×

Send article to Dropbox

To send this article to your Dropbox account, please select one or more formats and confirm that you agree to abide by our usage policies. If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your <service> account. Find out more about sending content to Dropbox.

BELIEF-TWISTING SHOCKS AND THE MACROECONOMY
Available formats
×

Send article to Google Drive

To send this article to your Google Drive account, please select one or more formats and confirm that you agree to abide by our usage policies. If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your <service> account. Find out more about sending content to Google Drive.

BELIEF-TWISTING SHOCKS AND THE MACROECONOMY
Available formats
×
×

Reply to: Submit a response

Please enter your response.

Your details

Please enter a valid email address.

Conflicting interests

Do you have any conflicting interests? *