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Quantifying Confidence

Listed author(s):
  • Angeletos, George-Marios
  • Collard, Fabrice
  • Dellas, Harris

We enrich workhorse macroeconomic models with a mechanism that proxies strategic uncertainty and that manifests itself as waves of optimism and pessimism about the short-term economic outlook. We interpret this mechanism as variation in "confidence" and show that it helps account for many salient features of the data; it drives a significant fraction of the volatility in estimated models that allow for multiple structural shocks; it captures a type of fluctuations in "aggregate demand" that does not rest on nominal rigidities; and it calls into question existing interpretations of the observed recessions. We complement these findings with evidence that most of the business cycle in the data is captured by an empirical factor which is unlike certain structural forces that are popular in the literature but similar to the one we formalize here.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 10463.

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Date of creation: Mar 2015
Handle: RePEc:cpr:ceprdp:10463
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  1. Alessandro Pavan, 2014. "Attention, Coordination, and Bounded Recall," Discussion Papers 1576, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  2. Fernando E. Alvarez & Francesco Lippi & Luigi Paciello, 2011. "Optimal Price Setting With Observation and Menu Costs," The Quarterly Journal of Economics, Oxford University Press, vol. 126(4), pages 1909-1960.
  3. 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, Oxford University Press, vol. 117(4), pages 1295-1328.
  4. Joel M. David & Hugo A. Hopenhayn & Venky Venkateswaran, 2016. "Information, Misallocation, and Aggregate Productivity," The Quarterly Journal of Economics, Oxford University Press, vol. 131(2), pages 943-1005.
  5. Jonathan Weinstein & Muhamet Yildiz, 2007. "A Structure Theorem for Rationalizability with Application to Robust Predictions of Refinements," Econometrica, Econometric Society, vol. 75(2), pages 365-400, 03.
  6. 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.
  7. Chari, V.V. & Kehoe, Patrick J. & McGrattan, Ellen R., 2008. "Are structural VARs with long-run restrictions useful in developing business cycle theory?," Journal of Monetary Economics, Elsevier, vol. 55(8), pages 1337-1352, November.
  8. Francisco J. Buera & Benjamin Moll, 2012. "Aggregate Implications of a Credit Crunch," NBER Working Papers 17775, National Bureau of Economic Research, Inc.
  9. Leonardo Melosi, 2014. "Estimating Models with Dispersed Information," American Economic Journal: Macroeconomics, American Economic Association, vol. 6(1), pages 1-31, January.
  10. Christiano, Lawrence & Motto, Roberto & Rostagno, Massimo & Ilut, Cosmin, 2008. "Monetary policy and stock market boom-bust cycles," Working Paper Series 955, European Central Bank.
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