The Anatomy of Sentiment-Driven Fluctuations

Sushant Acharya, Jess Benhabib and Zhen Huo

No 23136, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We show that sentiments - self-fulfilling changes in beliefs that are orthogonal to fundamentals - can drive persistent aggregate fluctuations under rational expectations. Such fluctuations can occur even in the absence of any exogenous aggregate fundamental shocks. In addition, sentiments also alter the volatility and persistence of aggregate outcomes in response to fundamental changes. We characterize conditions under which sentiments drive persistent fluctuations and when they only affect aggregate outcomes contemporaneously. We also discuss how these sentiments are related to noise shocks- driven fluctuations studied in the literature on information frictions.

JEL-codes: E20 E32 F44 (search for similar items in EconPapers)
Date: 2017-02
New Economics Papers: this item is included in nep-hpe, nep-mac and nep-mic
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Citations: View citations in EconPapers (20)

Published as Acharya, Sushant & Benhabib, Jess & Huo, Zhen, 2021. "The anatomy of sentiment-driven fluctuations," Journal of Economic Theory, Elsevier, vol. 195(C).

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Related works:
Journal Article: The anatomy of sentiment-driven fluctuations (2021)
Working Paper: The Anatomy of Sentiment-Driven Fluctuations (2021)
Working Paper: The Anatomy of Sentiment-driven Fluctuations (2017)
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