Applications

This chapter demonstrates the flexibility and explanatory power of SAGE by applying it to a range of relevant macroeconomic phenomena. It shows how boom–bust cycles, secular stagnation, and asset bubbles emerge as sentiment-contingent equilibria, even in the absence of structural shocks. The equity premium puzzle is explained by the disutility of illiquid, volatile capital, while exchange rate overshooting arises from rational portfolio shifts under belief swings. Sudden stops and capital flow reversals are traced to sentiment-induced liquidity preference shifts among global investors. The chapter also explores how financial frictions—such as liquidation costs and weak intermediation—amplify these dynamics by altering asset utility and portfolio composition. Growth is shown to depend not only on capital accumulation but also on sentiment-driven innovation incentives and financial structure. Labor force participation is modeled as a function of the perceived value of work, shaped by expectations of future returns and job security under varying sentiment regimes. Inflation dynamics are reinterpreted through shifts in liquidity preference and confidence, which can suppress or accelerate price pressures. SAGE is finally extended to an overlapping generations structure, allowing for demographic heterogeneity, intergenerational sentiment propagation, and life-cycle portfolio behavior. Collectively, these applications illustrate how SAGE replicates real-world dynamics as rational outcomes under uncertainty and belief asymmetry, offering a unified framework for analyzing diverse macro-financial phenomena.