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Do heterogenous beliefs drive the US business cycles?

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  • Cozzi, Guido
  • Di Dio, Fabio

Abstract

This paper estimates a Behavioural New Keynesian (BNK) model incorporating belief heterogeneity through a switching mechanism. Agents form expectations using either a forward-looking (rational) or backward-looking (extrapolative) rule, and their weights evolve endogenously based on past forecast performance. To identify the latent structural shocks and the time-varying composition of beliefs over the business cycle, we apply a simulation-based nonlinear filtering and backward smoothing routine, which recovers full-sample paths of unobserved states consistent with both equilibrium restrictions and observed macroeconomic data. Our results show that belief heterogeneity has moderate quantitative effects during normal times but significantly amplifies macroeconomic dynamics during periods of large shocks, such as the COVID-19 crisis. This highlights some limitations of rational expectations models and points to the relevance of endogenous expectation formation for business cycle analysis.

Suggested Citation

  • Cozzi, Guido & Di Dio, Fabio, 2026. "Do heterogenous beliefs drive the US business cycles?," Journal of Economic Behavior & Organization, Elsevier, vol. 245(C).
    • Handle: RePEc:eee:jeborg:v:245:y:2026:i:c:s0167268126000879
    DOI: 10.1016/j.jebo.2026.107501
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    Keywords

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    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E70 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics - - - General
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques

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