On the Nature and Stability of Sentiments

Ryan Chahrour and Gaetano Gaballo

No 873, Boston College Working Papers in Economics from Boston College Department of Economics

Abstract: We show that non-trivial aggregate fluctuations may originate with vanishingly- small common shocks to either information or fundamentals. These "sentiment" fluctuations can be driven by self-fulfilling variation in either first-order beliefs (as in Benhabib et al., 2015) or higher-order beliefs (as in Angeletos and La'O, 2013), due to an endogenous signal structure. We analyze out-of-equilibrium best-response functions in the underlying coordination game to study whether sentiment equilibria are stable outcomes of a convergent process. We nd that limiting sentiment equilibria are generally unattainable under both higher-order belief and adaptive learning dynamics, whereas equilibria without sentiment shocks show strong stability properties. Away from the limit case, however, multiple noisy rational expectations equilibria may be stable.

Keywords: imperfect information; animal spirits; expectational coordination (search for similar items in EconPapers)
JEL-codes: D82 D83 E3 (search for similar items in EconPapers)
Date: 2015-02-12, Revised 2015-05-05
New Economics Papers: this item is included in nep-mac, nep-mfd and nep-mic
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Citations: View citations in EconPapers (7)

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Working Paper: On the Nature and Stability of Sentiments (2015)
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