Econometrica: Sep 2018, Volume 86, Issue 5

Quantifying Confidence

https://doi.org/10.3982/ECTA13079
p. 1689-1726

George‐Marios Angeletos, Fabrice Collard, Harris Dellas

We develop a tractable method for augmenting macroeconomic models with autonomous variation in higher‐order beliefs. We use this to accommodate a certain type of waves of optimism and pessimism that can be interpreted as the product of frictional coordination and, unlike the one featured in the news literature, regards the short‐term economic outlook rather than the medium‐ to long‐run prospects. We show that this enrichment provides a parsimonious explanation of salient features of the data; it accounts for a significant fraction of the business‐cycle volatility in estimated models that allow for various competing structural shocks; and it captures a type of fluctuations that have a Keynesian flavor but do not rely on nominal rigidities.



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Supplemental Material

Supplement to "Quantifying Confidence"

In this appendix, we provide few results that complement the analysis in Sections 3 and 4.

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Supplement to "Quantifying Confidence"

This zip file contains the replication files for the manuscript.

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