Extrapolative expectations and macroeconomic dynamics: Evidence from an estimated DSGE model
Mikael Bask and
Joao Madeira ()
International Journal of Finance & Economics, 2021, vol. 26, issue 1, 1101-1111
We outline a dynamic stochastic general equilibrium (DSGE) model with extrapolative expectations in asset pricing and fit the model to 50 years of quarterly U.S. macroeconomic time series data with Bayesian techniques. We conclude that extrapolative expectations in asset pricing are statistically significant, quantitatively relevant and result in a substantial improvement in the model's fit to the data. In particular, extrapolative expectations in asset pricing lead to more pronounced hump‐shaped responses in the asset price and investment to shocks, and the model matches the degree of persistence observed in the asset price data significantly better than the alternative DSGE models considered here, which are the Smets and Wouters (2007; American Economic Review, 97, 586–606) model, including a variant of the model with pre‐determined investment expenditures, and the Gilchrist, Ortiz, and Zakrajsek (2009; Credit risk and the macroeconomy: Evidence from an estimated DSGE model. Mimeo) financial frictions model. Our findings are confirmed by numerous robustness exercises, including different prior assumptions, different sample periods and different time series variables, both excluding asset price data and the use of different asset price measures.
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:wly:ijfiec:v:26:y:2021:i:1:p:1101-1111
Ordering information: This journal article can be ordered from
http://jws-edcv.wile ... PRINT_ISSN=1076-9307
Access Statistics for this article
International Journal of Finance & Economics is currently edited by Mark P. Taylor, Keith Cuthbertson and Michael P. Dooley
More articles in International Journal of Finance & Economics from John Wiley & Sons, Ltd.
Bibliographic data for series maintained by Wiley Content Delivery ().