The Anatomy of Sentiment-driven Fluctuations

Zhen Huo, Jess Benhabib and Sushant Acharya

No 513, 2017 Meeting Papers from Society for Economic Dynamics

Abstract: We characterize the entire set of linear equilibria of beauty contest games under general information structures. In particular, we focus on equilibria in which sentiments-self-fullling changes in beliefs that are orthogonal to fundamentals and exogenous noise - can drive aggregate fluctuations. We show that, under rational expectations, there exists a continuum of sentiment-driven equilibria that generate aggregate uctuations. Without having to take a stance on the private information agents might possess, we provide a general characterization of necessary and sufficient conditions under which a change in sentiments can have prolonged effects on aggregate outcomes and when it can only have short-lived effects. In addition, we also provide a practical way to characterize these equilibria.

Date: 2017
New Economics Papers: this item is included in nep-hpe
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Citations: View citations in EconPapers (16)

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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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