On the Nature and Stability of Sentiments

Gaetano Gaballo and Ryan Chahrour

No 469, 2015 Meeting Papers from Society for Economic Dynamics

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 find 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.

Date: 2015
New Economics Papers: this item is included in nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

Downloads: (external link)
https://red-files-public.s3.amazonaws.com/meetpapers/2015/paper_469.pdf (application/pdf)

Related works:
Working Paper: On the Nature and Stability of Sentiments (2015)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:red:sed015:469

Access Statistics for this paper

More papers in 2015 Meeting Papers from Society for Economic Dynamics Contact information at EDIRC.
Bibliographic data for series maintained by Christian Zimmermann ().