NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Quantifying Confidence

George-Marios Angeletos, Fabrice Collard, Harris Dellas

NBER Working Paper No. 20807
Issued in December 2014, Revised in December 2017
NBER Program(s):Economic Fluctuations and Growth, Monetary Economics

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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Document Object Identifier (DOI): 10.3386/w20807

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