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Uncertainty and Sentiment-Driven Equilibria

  • Jess Benhabib
  • Pengfei Wang
  • Yi Wen

We construct a model to capture the Keynesian idea that production and employment decisions are based on expectations of aggregate demand driven by sentiments, and that realized demand follows from the production and employment decisions of firms. We cast the Keynesian idea into a simple model with imperfect information about aggregate demand and we characterize the rational expectations equilibria of this model. We find that the equilibrium is not unique despite the absence of any non-convexities or strategic complementarity in the model. In addition to multiple fundamental equilibria, there can be serially correlated stochastic equilibria driven by self-fulfilling consumer sentiments. Furthermore, these sentiment-driven equilibria are not based on randomizations of the fundamental equilibria

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18878.

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Date of creation: Mar 2013
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Handle: RePEc:nbr:nberwo:18878
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  1. R. Aumann, 2010. "Subjectivity and Correlation in Randomized Strategies," Levine's Working Paper Archive 389, David K. Levine.
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  11. Benhabib, Jess & Farmer, Roger E.A., 1991. "Indeterminacy and Increasing Returns," Working Papers 91-59, C.V. Starr Center for Applied Economics, New York University.
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  14. Peck, James & Shell, Karl, 1991. "Market Uncertainty: Correlated and Sunspot Equilibria in Imperfectly Competitive Economies," Review of Economic Studies, Wiley Blackwell, vol. 58(5), pages 1011-29, October.
  15. Jess Benhabib & Pengfei Wang & Yi Wen, 2015. "Sentiments and Aggregate Demand Fluctuations," Econometrica, Econometric Society, vol. 83, pages 549-585, 03.
  16. Dirk Bergemann & Tibor Heumann & Stephen Morris, 2014. "Information, Interdependence, and Interaction: Where Does the Volatility Come from?," Levine's Working Paper Archive 786969000000000892, David K. Levine.
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  18. George-Marios Angeletos & Christian Hellwig & Alessandro Pavan, 2005. "Signaling in a Global Game: Coordination and Policy Traps," Discussion Papers 1400, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  19. Cass, David & Shell, Karl, 1983. "Do Sunspots Matter?," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 193-227, April.
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