IDEAS home Printed from https://ideas.repec.org/p/red/sed017/513.html
   My bibliography  Save this paper

The Anatomy of Sentiment-driven Fluctuations

Author

Listed:
  • Zhen Huo

    (Yale University)

  • Jess Benhabib

    (NYU)

  • Sushant Acharya

    (Federal Reserve Bank of New York)

Abstract

We characterize the entire set of linear equilibria of beauty contest games under general information structures. In particular, we focus on equilibria in which sentiments-self-fullling changes in beliefs that are orthogonal to fundamentals and exogenous noise - can drive aggregate fluctuations. We show that, under rational expectations, there exists a continuum of sentiment-driven equilibria that generate aggregate uctuations. Without having to take a stance on the private information agents might possess, we provide a general characterization of necessary and sufficient conditions under which a change in sentiments can have prolonged effects on aggregate outcomes and when it can only have short-lived effects. In addition, we also provide a practical way to characterize these equilibria.

Suggested Citation

  • Zhen Huo & Jess Benhabib & Sushant Acharya, 2017. "The Anatomy of Sentiment-driven Fluctuations," 2017 Meeting Papers 513, Society for Economic Dynamics.
    • Handle: RePEc:red:sed017:513
    as

    Download full text from publisher

    File URL: https://red-files-public.s3.amazonaws.com/meetpapers/2017/paper_513.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Chahrour, Ryan & Gaballo, Gaetano, 2017. "Learning from prices: amplication and business fluctuations," Working Paper Series 2053, European Central Bank.
    2. Dirk Bergemann & Stephen Morris, 2013. "Robust Predictions in Games With Incomplete Information," Econometrica, Econometric Society, vol. 81(4), pages 1251-1308, July.
    3. George-Marios Angeletos & Jennifer La'O, 2010. "Noisy Business Cycles," NBER Chapters, in: NBER Macroeconomics Annual 2009, Volume 24, pages 319-378, National Bureau of Economic Research, Inc.
    4. N. Gregory Mankiw & Ricardo Reis, 2002. "Sticky Information versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 117(4), pages 1295-1328.
    5. Bartosz Mackowiak & Mirko Wiederholt, 2009. "Optimal Sticky Prices under Rational Inattention," American Economic Review, American Economic Association, vol. 99(3), pages 769-803, June.
    6. Forges, Francoise & Peck, James, 1995. "Correlated Equilibrium and Sunspot Equilibrium," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 5(1), pages 33-50, January.
    7. Jess Benhabib & Pengfei Wang & Yi Wen, 2015. "Sentiments and Aggregate Demand Fluctuations," Econometrica, Econometric Society, vol. 83, pages 549-585, March.
    8. George‐Marios Angeletos & Fabrice Collard & Harris Dellas, 2018. "Quantifying Confidence," Econometrica, Econometric Society, vol. 86(5), pages 1689-1726, September.
    9. Aumann, Robert J., 1974. "Subjectivity and correlation in randomized strategies," Journal of Mathematical Economics, Elsevier, vol. 1(1), pages 67-96, March.
    10. Kristoffer P. Nimark, 2014. "Man-Bites-Dog Business Cycles," American Economic Review, American Economic Association, vol. 104(8), pages 2320-2367, August.
    11. Jess Benhabib & Pengfei Wang & Yi Wen, 2017. "Uncertainty and Sentiment-Driven Equilibria," Studies in Economic Theory, in: Kazuo Nishimura & Alain Venditti & Nicholas C. Yannelis (ed.), Sunspots and Non-Linear Dynamics, chapter 0, pages 281-304, Springer.
    12. Kristoffer Nimark, 2007. "Dynamic higher order expectations," Economics Working Papers 1118, Department of Economics and Business, Universitat Pompeu Fabra, revised Mar 2011.
    13. Chahrour, Ryan & Ulbricht, Robert, 2017. "Information-driven Business Cycles: A Primal Approach," TSE Working Papers 17-784, Toulouse School of Economics (TSE), revised Dec 2017.
    14. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2005. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 113(1), pages 1-45, February.
    15. Gabriel Zucman, 2013. "The Missing Wealth of Nations: Are Europe and the U.S. net Debtors or net Creditors?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 128(3), pages 1321-1364.
    16. Russell Cooper & Andrew John, 1988. "Coordinating Coordination Failures in Keynesian Models," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 103(3), pages 441-463.
    17. repec:cwl:cwldpp:1821rrr is not listed on IDEAS
    18. Kenneth Kasa, 2000. "Forecasting the Forecasts of Others in the Frequency Domain," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 3(4), pages 726-756, October.
    19. Cass, David & Shell, Karl, 1983. "Do Sunspots Matter?," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 193-227, April.
    20. Athanasios Orphanides, 2001. "Monetary Policy Rules Based on Real-Time Data," American Economic Review, American Economic Association, vol. 91(4), pages 964-985, September.
    21. Frank Smets & Rafael Wouters, 2007. "Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach," American Economic Review, American Economic Association, vol. 97(3), pages 586-606, June.
    22. Jess Benhabib & Mark M Spiegel, 2019. "Sentiments and Economic Activity: Evidence from US States," The Economic Journal, Royal Economic Society, vol. 129(618), pages 715-733.
    23. James Peck & Karl Shell, 1991. "Market Uncertainty: Correlated and Sunspot Equilibria in Imperfectly Competitive Economies," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(5), pages 1011-1029.
    24. Benjamin Hébert & Jennifer La’O, 2023. "Information Acquisition, Efficiency, and Nonfundamental Volatility," Journal of Political Economy, University of Chicago Press, vol. 131(10), pages 2666-2723.
    25. Ellen R. McGrattan & Edward C. Prescott, 2014. "A Reassessment of Real Business Cycle Theory," American Economic Review, American Economic Association, vol. 104(5), pages 177-182, May.
    26. Sushant Acharya & Shu Lin Wee, 2020. "Rational Inattention in Hiring Decisions," American Economic Journal: Macroeconomics, American Economic Association, vol. 12(1), pages 1-40, January.
    27. Spear, Stephen E, 1989. "Are Sunspots Necessary?," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 965-973, August.
    28. S. Borağan Aruoba, 2008. "Data Revisions Are Not Well Behaved," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(2‐3), pages 319-340, March.
    29. Sims, Christopher A., 2003. "Implications of rational inattention," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 665-690, April.
    30. Maskin, Eric & Tirole, Jean, 1987. "Correlated equilibria and sunspots," Journal of Economic Theory, Elsevier, vol. 43(2), pages 364-373, December.
    31. Guido Lorenzoni, 2009. "A Theory of Demand Shocks," American Economic Review, American Economic Association, vol. 99(5), pages 2050-2084, December.
    32. Franklin Allen & Stephen Morris & Hyun Song Shin, 2006. "Beauty Contests and Iterated Expectations in Asset Markets," The Review of Financial Studies, Society for Financial Studies, vol. 19(3), pages 719-752.
    33. Benhabib, Jess & Liu, Xuewen & Wang, Pengfei, 2016. "Endogenous information acquisition and countercyclical uncertainty," Journal of Economic Theory, Elsevier, vol. 165(C), pages 601-642.
    34. Rondina, Giacomo & Walker, Todd B., 2021. "Confounding dynamics," Journal of Economic Theory, Elsevier, vol. 196(C).
    35. Bergemann, Dirk & Heumann, Tibor & Morris, Stephen, 2015. "Information and volatility," Journal of Economic Theory, Elsevier, vol. 158(PB), pages 427-465.
    36. Christian Hellwig, 2002. "Public Announcements, Adjustment Delays, and the Business Cycle (November 2002)," UCLA Economics Online Papers 208, UCLA Department of Economics.
    37. George-Marios Angeletos & Zhen Huo, 2021. "Myopia and Anchoring," American Economic Review, American Economic Association, vol. 111(4), pages 1166-1200, April.
    38. Robert B. Barsky & Eric R. Sims, 2012. "Information, Animal Spirits, and the Meaning of Innovations in Consumer Confidence," American Economic Review, American Economic Association, vol. 102(4), pages 1343-1377, June.
    39. John G. Fernald, 2012. "A quarterly, utilization-adjusted series on total factor productivity," Working Paper Series 2012-19, Federal Reserve Bank of San Francisco.
    40. Stephen Morris & Hyun Song Shin, 2002. "Social Value of Public Information," American Economic Review, American Economic Association, vol. 92(5), pages 1521-1534, December.
    41. Townsend, Robert M, 1983. "Forecasting the Forecasts of Others," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 546-588, August.
    42. Piero Gottardi & Atsushi Kajii, 1999. "The Structure of Sunspot Equilibria: The Role of Multiplicity," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 66(3), pages 713-732.
    43. repec:hal:pseose:halshs-01053616 is not listed on IDEAS
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Angeletos, G.-M. & Lian, C., 2016. "Incomplete Information in Macroeconomics," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 1065-1240, Elsevier.
    2. George-Marios Angeletos, 2018. "Frictional Coordination," Journal of the European Economic Association, European Economic Association, vol. 16(3), pages 563-603.
    3. George-Marios Angeletos & Chen Lian, 2016. "Incomplete Information in Macroeconomics: Accommodating Frictions in Coordination," NBER Working Papers 22297, National Bureau of Economic Research, Inc.
    4. George-Marios Angeletos & Chen Lian, 2018. "Forward Guidance without Common Knowledge," American Economic Review, American Economic Association, vol. 108(9), pages 2477-2512, September.
    5. Guido Lorenzoni, 2009. "A Theory of Demand Shocks," American Economic Review, American Economic Association, vol. 99(5), pages 2050-2084, December.
    6. George‐Marios Angeletos & Fabrice Collard & Harris Dellas, 2018. "Quantifying Confidence," Econometrica, Econometric Society, vol. 86(5), pages 1689-1726, September.
    7. Leonardo Melosi, 2017. "Signalling Effects of Monetary Policy," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 84(2), pages 853-884.
    8. Xu, Zhiwei & Zhou, Fei & Zhou, Jing, 2022. "Sentiments and real business cycles," Journal of Economic Dynamics and Control, Elsevier, vol. 141(C).
    9. Angeletos, George-Marios & La’O, Jennifer, 2009. "Incomplete information, higher-order beliefs and price inertia," Journal of Monetary Economics, Elsevier, vol. 56(S), pages 19-37.
    10. Huo, Zhen & Pedroni, Marcelo, 2023. "Dynamic information aggregation: Learning from the past," Journal of Monetary Economics, Elsevier, vol. 136(C), pages 107-124.
    11. Benhima, Kenza, 2019. "Booms and busts with dispersed information," Journal of Monetary Economics, Elsevier, vol. 107(C), pages 32-47.
    12. Mäkinen, Taneli & Ohl, Björn, 2015. "Information acquisition and learning from prices over the business cycle," Journal of Economic Theory, Elsevier, vol. 158(PB), pages 585-633.
    13. Falck, Elisabeth & Hoffmann, Mathias & Hürtgen, Patrick, 2017. "Disagreement and monetary policy," Discussion Papers 29/2017, Deutsche Bundesbank.
    14. Jonathan J Adams, 2019. "Macroeconomic Models with Incomplete Information and Endogenous Signals," Working Papers 001004, University of Florida, Department of Economics.
    15. Jenny Chan, 2020. "Monetary Policy and Sentiment-Driven Fluctuations," Discussion Papers 2020, Centre for Macroeconomics (CFM).
    16. Alexandre Kohlhas, 2015. "Learning-by-Sharing: Monetary Policy and the Information Content of Public Signals," 2015 Meeting Papers 57, Society for Economic Dynamics.
    17. Michael Rousakis, 2013. "Expectations and Fluctuations: The Role of Monetary Policy," 2013 Meeting Papers 681, Society for Economic Dynamics.
    18. Atahan Afsar; José Elías Gallegos; Richard Jaimes; Edgar Silgado Gómez & José Elías Gallegos & Richard Jaimes & Edgar Silgado Gómez, 2020. "Reconciling Empirics and Theory: The Behavioral Hybrid New Keynesian Model," Vniversitas Económica, Universidad Javeriana - Bogotá, vol. 0(0), pages 1-41, December.
    19. Giacomo Rondina & Todd Walker, 2016. "Learning and Informational Stability of Dynamic REE with Incomplete Information," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 21, pages 147-159, July.
    20. Candian, Giacomo, 2019. "Information frictions and real exchange rate dynamics," Journal of International Economics, Elsevier, vol. 116(C), pages 189-205.

    More about this item

    JEL classification:

    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:red:sed017:513. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Christian Zimmermann (email available below). General contact details of provider: https://edirc.repec.org/data/sedddea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.