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Macroeconomic Vulnerability and Disagreement in Expectations

57 Pages Posted: 15 Dec 2011  

Cristian Badarinza

National University of Singapore (NUS)

Marco Buchmann

European Central Bank (ECB)

Date Written: December 5, 2011

Abstract

In this paper we discuss the role of the cross-sectional heterogeneity of beliefs in the context of understanding and assessing macroeconomic vulnerability. Emphasis lies on the potential of changing levels of disagreement in expectations to influence the propensity of the economy to switch between different regimes, a hypothesis that finds robust empirical support from a regime-switching model with endogenous transition probabilities for output growth and realized stock market volatility in the US.

Keywords: Heterogeneous beliefs, business cycles, regime-switching, forecasting, endogenous transition probabilities

JEL Classification: C53, D8, E32

Suggested Citation

Badarinza, Cristian and Buchmann, Marco, Macroeconomic Vulnerability and Disagreement in Expectations (December 5, 2011). ECB Working Paper No. 1407. Available at SSRN: https://ssrn.com/abstract=1968479

Cristian Badarinza (Contact Author)

National University of Singapore (NUS) ( email )

Bukit Timah Road 469 G
Singapore, 117591
Singapore

Marco Buchmann

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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