TY - JOUR
T1 - Sentiments and Real Business Cycles
AU - Xu, Zhiwei
AU - Zhou, Fei
AU - Zhou, Jing
N1 - Funding Information:
We thank the editors and our discussant Jieran Wu for their valuable comments and suggestions, which greatly improved our paper. We also thank the participants at the 2021 Conference on Markets & Economies with Information Frictions. Zhiwei Xu acknowledges the financial support of the National Natural Science Foundation of China (Grant nos. 72022011 , 72150003 ). Fei Zhou acknowledges the financial support of HKBU One-off Tier 2 Start-up Grant (RC-OFSGT2/20-21/BUS/002). Jing Zhou acknowledges the financial support of the Shanghai Institute of International Finance and Economics.
Publisher Copyright:
© 2022 Elsevier B.V.
PY - 2022/8
Y1 - 2022/8
N2 - We introduce sentiments under incomplete information in an otherwise standard real business cycle model. Individual firms receive signals about their idiosyncratic demand shocks, which are confounded by sentiments. Sentiments coordinate the optimal decisions of individual firms through their extraction of aggregate economic conditions from the signals. We show that there exists a sentiment-driven rational expectations equilibrium, in addition to a fundamental equilibrium. Optimism stimulates the aggregate economy, leading to positive comovements between output, consumption, investment, and hours worked. We calibrate a full-fledged dynamic stochastic general equilibrium model based on U.S. aggregate data and find that sentiment shocks substantially amplify aggregate fluctuations and contribute to real business cycles.
AB - We introduce sentiments under incomplete information in an otherwise standard real business cycle model. Individual firms receive signals about their idiosyncratic demand shocks, which are confounded by sentiments. Sentiments coordinate the optimal decisions of individual firms through their extraction of aggregate economic conditions from the signals. We show that there exists a sentiment-driven rational expectations equilibrium, in addition to a fundamental equilibrium. Optimism stimulates the aggregate economy, leading to positive comovements between output, consumption, investment, and hours worked. We calibrate a full-fledged dynamic stochastic general equilibrium model based on U.S. aggregate data and find that sentiment shocks substantially amplify aggregate fluctuations and contribute to real business cycles.
KW - Business cycle comovement
KW - Real business cycles
KW - Self-fulfilling equilibria
KW - Sentiments
UR - http://www.scopus.com/inward/record.url?scp=85130038771&partnerID=8YFLogxK
U2 - 10.1016/j.jedc.2022.104399
DO - 10.1016/j.jedc.2022.104399
M3 - Journal article
SN - 0165-1889
VL - 141
JO - Journal of Economic Dynamics and Control
JF - Journal of Economic Dynamics and Control
M1 - 104399
ER -