Hostname: page-component-848d4c4894-mwx4w Total loading time: 0 Render date: 2024-07-01T10:39:21.576Z Has data issue: false hasContentIssue false
  • English
  • Français

BELIEF-TWISTING SHOCKS AND THE MACROECONOMY

Published online by Cambridge University Press:  19 February 2018

Jacek Suda
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.
Get access Rights & Permissions [Opens in a new window]

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.

Keywords

Bayesian LearningBusiness CyclesNon-Linear Dynamics
Type
Articles
Information
Macroeconomic Dynamics , Volume 22 , Special Issue 7: Recent Insights into Financial, Housing, and Monetary Markets , October 2018 , pp. 1844 - 1858
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

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), 2477–2508.Google Scholar
Barro, R. J. (2006) Rare disasters and asset markets in the twentieth century. Quarterly Journal of Economics 121 (3), 823–866.Google Scholar
Bullard, J. B. and Singh, A. (2012) Learning and the great moderation. International Economic Review 53, 375–397.Google Scholar
Bullard, J. B. and Suda, J. (2016) Stability theorems for macroeconomic systems with Bayesian learners. Journal of Economic Dynamics and Control 62, 1–26.Google 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), 787–805.Google Scholar
Cogley, T. and Sargent, T. J. (2008a) Anticipated utility and rational expectations as approximations of Bayesian decision making. International Economic Review 49 (1), 185–221.Google 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), 454–476.Google 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), 607–635.Google Scholar
Eusepi, S. and Preston, B. (2011) Expectations, learning and business cycle fluctuations. American Economic Review 101 (6), 2844–72.Google 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), 373–416.Google Scholar
Malmendier, U. and Nagel, S. (2016) Learning from inflation experiences. Quarterly Journal of Economics 131 (1), 53–87.Google Scholar
Modigliani, F. (1986) Life cycle, individual thrift, and the wealth of nations. American Economic Review 76 (3), 297–313.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), 1102–1130.Google Scholar