MODELING THE EVOLUTION OF EXPECTATIONS AND UNCERTAINTY IN GENERAL EQUILIBRIUM

Francesco Bianchi and Leonardo Melosi

International Economic Review, 2016, vol. 57, issue 2, 717-756

Abstract: We develop methods to solve general equilibrium models in which forward‐looking agents are subject to waves of pessimism, optimism, and uncertainty that turn out to critically affect macroeconomic outcomes. Agents in the model are fully rational and conduct Bayesian learning, and they know that they do not know. Therefore, agents take into account that their beliefs will evolve according to what they will observe. This framework accommodates both gradual and abrupt changes in beliefs and allows for an analytical characterization of uncertainty. We use a prototypical Real Business Cycle model to illustrate the methods.

Date: 2016
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Citations: View citations in EconPapers (11)

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https://doi.org/10.1111/iere.12174

Related works:
Working Paper: Modeling the Evolution of Expectations and Uncertainty in General Equilibrium (2013)
Working Paper: Modeling the Evolution of Expectations and Uncertainty in General Equilibrium (2013)
Working Paper: Modeling the Evolution of Expectations and Uncertainty in General Equilibrium (2013)
Working Paper: Modeling the Evolution of Expectations and Uncertainty in General Equilibrium (2012)
Working Paper: Modeling the Evolution of Expectations and Uncertainty in General Equilibrium (2012)
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