The anatomy of sentiment-driven fluctuations

Arbeitspapier

We show that sentiments - self-fulfilling changes in beliefs that are orthogonal to fundamentals - can drive persistent aggregate fluctuations under rational expectations in a beauty contest game. Such fluctuations can occur even in the absence of exogenous aggregate fundamental shocks. Moreover, sentiments alter the volatility and persistence of aggregate outcomes in response to fundamental shocks. We provide (i) necessary conditions under which sentiments can affect aggregate outcomes in equilibrium and (ii) conditions under which sentiments drive persistent fluctuations and when they only affect aggregate outcomes contemporaneously. We also show that sentiment equilibria are stable under least-squares learning while the fundamental equilibrium is not.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Bank of Canada Staff Working Paper ; No. 2021-33

Classification and Topics

• Classification: Wirtschaft ; Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy: General (includes Measurement and Data) ; Business Fluctuations; Cycles
• Subject: Business fluctuations and cycles ; Economic models

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Acharya, Sushant ; Benhabib, Jess ; Huo, Zhen
• Event: Veröffentlichung
• (who): Bank of Canada
• (where): Ottawa
• (when): 2021

Further information

• DOI: doi:10.34989/swp-2021-33
• Handle: http://hdl.handle.net/10419/247413
• Last update: 10.03.2025, 11:44 AM CET