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  5. Beliefs, Learning, and the Macroeconomy
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Beliefs, Learning, and the Macroeconomy

Paper Session

Tuesday, Jan. 5, 2021 12:15 PM - 2:15 PM (EST)

Hosted By: American Economic Association
  • Chair: Andrei Shleifer, Harvard University

Real Credit Cycles

Pedro Bordalo
,
University of Oxford
Nicola Gennaioli
,
Bocconi University
Andrei Shleifer
,
Harvard University
Stephen J. Terry
,
Boston University

Abstract

We assess whether belief overreaction to standard TFP shocks may produce observed boom-bust credit cycles. We incorporate diagnostic expectations into a workhorse business cycle model with heterogeneous firms and risky debt. A realistic degree of diagnosticity, estimated from the forecast errors of managers of US listed firms, produces significant fragility of the economy during good times. This helps account for countercyclical credit spreads and for credit cycles at both the firm and aggregate levels. Lax financial conditions predict future increases in spreads, low bond returns, and investment drops. Spread increases of the magnitude observed during 2008-9 obtain from modest negative TFP shocks. Our results indicate that diagnostic expectations may offer a realistic and parsimonious way to produce financial reversals in conventional business cycles models.

Fiscal Policy and Households’ Inflation Expectations: Evidence from a Randomized Control Trial

Olivier Coibion
,
University of Texas-Austin
Yuriy Gorodnichenko
,
University of California-Berkeley
Michael Weber
,
University of Chicago

Abstract

TBD

Belief Distortions and Macroeconomic Fluctuations

Francesco Bianchi
,
Duke University
Sydney C. Ludvigson
,
New York University
Sai Ma
,
Federal Reserve Board

Abstract

TBD
Discussant(s)
Cosmin Ilut
,
Duke University
Jonathan Parker
,
Massachusetts Institute of Technology
Christopher Sims
,
Princeton University
Nicola Gennaioli
,
Bocconi University
JEL Classifications
  • E7 - Macro-Based Behavioral Economics
  • G4 - Behavioral Finance