Belief shocks and the macroeconomy

J. Suda

Working papers from Banque de France

Abstract: I study the role of shocks to beliefs combined with Bayesian learning in a standard equilibrium business cycle framework. By adapting ideas from Cogley and Sargent (2008b) to the general equilibrium setting, I am able to study how a prior belief arising from the Great Depression may have influenced the macroeconomy during the last 75 years. In the model, households hold twisted beliefs concerning the likelihood and persistence of recession and boom states, beliefs which are only gradually unwound during subsequent years. Even though the driving stochastic process for technology is unchanged over the entire period, the nature of macroeconomic performance is altered considerably for many decades before eventually converging to the rational expectations equilibrium. This provides some evidence of the lingering effects of beliefs-twisting events on the behavior of macroeconomic variables.

Keywords: Bayesian learning; business cycles; Great Depression. (search for similar items in EconPapers)
JEL-codes: D83 D84 E32 E37 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2013
New Economics Papers: this item is included in nep-dge and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:bfr:banfra:434

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