Modeling the Evolution of Expectations and Uncertainty in General Equilibrium
Francesco Bianchi and
Leonardo Melosi
No WP-2013-12, Working Paper Series from Federal Reserve Bank of Chicago
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, 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. Shocks to beliefs affect economic dynamics and uncertainty. We use a prototypical Real Business Cycle to illustrate the methods.
Keywords: Markov switching; general equilibrium models; uncertainty; Bayesian learning; rational expectations; downside risk; rare disasters (search for similar items in EconPapers)
JEL-codes: C11 D83 E22 (search for similar items in EconPapers)
Pages: 55 pages
Date: 2013-09-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)
Downloads: (external link)
http://www.chicagofed.org/digital_assets/publicati ... s/2013/wp2013_12.pdf Full text (application/pdf)
Related works:
Journal Article: MODELING THE EVOLUTION OF EXPECTATIONS AND UNCERTAINTY IN GENERAL EQUILIBRIUM (2016) 
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) 
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:fip:fedhwp:wp-2013-12
Ordering information: This working paper can be ordered from
Access Statistics for this paper
More papers in Working Paper Series from Federal Reserve Bank of Chicago Contact information at EDIRC.
Bibliographic data for series maintained by Lauren Wiese ().