Learning, Confidence and Business Cycle

Hikaru Saijo and Cosmin Ilut

No 664, 2016 Meeting Papers from Society for Economic Dynamics

Abstract: We construct and estimate a heterogeneous-firm business cycle model where firms face Knightian uncertainty about their profitability and learn it through production. The cross-sectional mean of firm-level uncertainty is high in recessions because firms invest and hire less. The higher uncertainty reduces agents' confidence and further discourages economic activity. This feedback mechanism endogenously generates properties traditionally explained through additional shocks or rigidities: countercyclical labor and financial wedges, co-movement driven by demand shocks, and amplified and hump-shaped dynamics. We find that endogenous idiosyncratic confidence reduces the empirical role of standard rigidities and changes inference about sources of fluctuations and policy experiments.

Date: 2016
New Economics Papers: this item is included in nep-bec, nep-dge and nep-mac
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Learning, confidence, and business cycles (2021)
Working Paper: Learning, Confidence, and Business Cycles (2016)
Working Paper: Learning, Confidence, and Business Cycles (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed016:664

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