Sentiments and Aggregate Demand Fluctuations

Abstract: We formalize the Keynesian insight that aggregate demand driven by sentiments can generate output fluctuations under rational expectations. When production decisions must be made under imperfect information about demand, optimal decisions based on sentiments can generate stochastic self-fulfilling rational expectations equilibria in standard economies without persistent informational frictions, externalities, nonconvexities, or strategic complementarities in production. The models we consider are deliberately simple, but could serve as benchmarks for more complicated equilibrium models with additional features.

Full paper can be found here.

Synchronization and Bias in a Simple Macroeconomic Model

Abstract: In models with strategic uncertainty, such as macroeconomic models with multiple equilibria, agents must form beliefs about the actions of other players. In sunspot models agents coordinate by using an exogenous stochastic process, which is not inherently related to the fundamentals of the economy. I consider such a model with multiple equilibria, and assume that agents must learn to use the sunspot variables. I show that if different agents measure output with a slight bias (though the average bias in the economy vanishes), this leads to a complex nonlinear dynamic of synchronization of beliefs about the equilibrium being played. The economy fluctuates between long eras where the agents beliefs are almost homogenous and therefore they are coordinated on the use of the sunspots, and eras of dispersed beliefs where the coordination mechanism fails. I show that the equation describing the evolution of the economy is similar to the Kuramoto model, a prototypical model of synchronization phenomena, and make some first attempts at mapping the connections.

Full paper can be found here.