Quantifying Confidence

68 Pages Posted: 2 Mar 2015

See all articles by George-Marios Angeletos

George-Marios Angeletos

Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER)

Fabrice Collard

Universite de Toulouse I - CNRS (GREMAQ and IDEI)

Harris Dellas

University of Bern - Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 3 versions of this paper

Date Written: March 2015

Abstract

We enrich workhorse macroeconomic models with a mechanism that proxies strategic uncertainty and that manifests itself as waves of optimism and pessimism about the short-term economic outlook. We interpret this mechanism as variation in "confidence" and show that it helps account for many salient features of the data; it drives a significant fraction of the volatility in estimated models that allow for multiple structural shocks; it captures a type of fluctuations in "aggregate demand" that does not rest on nominal rigidities; and it calls into question existing interpretations of the observed recessions. We complement these findings with evidence that most of the business cycle in the data is captured by an empirical factor which is unlike certain structural forces that are popular in the literature but similar to the one we formalize here.

Keywords: aggregate demand, business cycles, confidence, coordination failure, DSGE models, higher-order beliefs, strategic uncertainty

JEL Classification: E32

Suggested Citation

Angeletos, George-Marios and Collard, Fabrice and Dellas, Harris, Quantifying Confidence (March 2015). CEPR Discussion Paper No. DP10463, Available at SSRN: https://ssrn.com/abstract=2572461

George-Marios Angeletos (Contact Author)

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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Fabrice Collard

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Harris Dellas

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