Quantifying Confidence
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.
Published Versions
George‐Marios Angeletos & Fabrice Collard & Harris Dellas, 2018. "Quantifying Confidence," Econometrica, Econometric Society, vol. 86(5), pages 1689-1726, September. citation courtesy of