NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Sushant Acharya

Macroeconomic and Monetary Studies Function
Federal Reserve Bank of New York
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New York, NY 10045

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NBER Working Papers and Publications

February 2017The Anatomy of Sentiment-Driven Fluctuations
with Jess Benhabib, Zhen Huo: w23136
We characterize the entire set of linear equilibria of beauty contest games under general information structures. In particular, we focus on equilibria in which sentiments, that is self-fulfilling changes in beliefs that are orthogonal to fundamentals and exogenous noise, can drive aggregate fluctuations. We show that, under rational expectations, there exists a continuum of sentiment-driven equilibria that generate aggregate fluctuations. Without having to take a stance on the private information agents might possess, we provide a general characterization of necessary and sufficient conditions under which a change in sentiments can have prolonged effects on aggregate outcomes and when it can only have short-lived effects. In addition, we also provide a practical way to characterize thes...
 
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