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The Anatomy of Sentiment-Driven Fluctuations

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  • Sushant Acharya
  • Jess Benhabib
  • Zhen Huo

Abstract

We show that sentiments - self-fulfilling changes in beliefs that are orthogonal to fundamentals - can drive persistent aggregate fluctuations under rational expectations. Such fluctuations can occur even in the absence of any exogenous aggregate fundamental shocks. In addition, sentiments also alter the volatility and persistence of aggregate outcomes in response to fundamental changes. We characterize conditions under which sentiments drive persistent fluctuations and when they only affect aggregate outcomes contemporaneously. We also discuss how these sentiments are related to noise shocks- driven fluctuations studied in the literature on information frictions.

Suggested Citation

  • Sushant Acharya & Jess Benhabib & Zhen Huo, 2017. "The Anatomy of Sentiment-Driven Fluctuations," NBER Working Papers 23136, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:23136
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    JEL classification:

    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles

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