Believe it or not, it’s all about Beliefs!

Patrick Fève, Fabrice Collard and Alain Guay

No 24-1539, TSE Working Papers from Toulouse School of Economics (TSE)

Abstract: This paper studies the impact of Higher Order Belief (HOB) shocks, representing shifts in agents’ beliefs about others’ beliefs, on macroeconomic outcomes. The dynamic causal effects of these shocks are identified by leveraging a combination of a proxy-VAR approach and DSGE-based instruments. Our findings suggest that HOB shocks are indeed a key driver of the business cycle and account for a sizeable share of the observed business cycle volatility. Finally, our identification approach ensures that these shocks are not confounded with other structural/fundamental shocks.

Keywords: Higher Order Beliefs; Business cycles; proxy-VAR; DSGE (search for similar items in EconPapers)
JEL-codes: C32 E32 (search for similar items in EconPapers)
Date: 2024-05-23
New Economics Papers: this item is included in nep-dge
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Persistent link: https://EconPapers.repec.org/RePEc:tse:wpaper:129351

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