Survey Data and Subjective Beliefs in Business Cycle Models

61 Pages Posted: 18 Apr 2016 Last revised: 19 Sep 2019

See all articles by Anmol Bhandari

Anmol Bhandari

University of Minnesota - Minneapolis - Department of Economics

Jaroslav Borovička

New York University (NYU) - Department of Economics; National Bureau of Economic Research (NBER)

Paul Ho

Federal Reserve Banks - Federal Reserve Bank of Richmond

Multiple version iconThere are 3 versions of this paper

Date Written: September 3, 2019

Abstract

This paper develops a theory of subjective beliefs that departs from rational expectations, and shows that biases in household beliefs have quantitatively large effects on macroeconomic aggregates. The departures are formalized using model-consistent notions of pessimism and optimism and are disciplined by data on household forecasts. The role of subjective beliefs is quantified in a business cycle model with goods and labor market frictions. Consistent with the survey evidence, an increase in pessimism generates upward biases in unemployment and inflation forecasts and lowers economic activity. The underlying belief distortions reduce aggregate demand and propagate through frictional goods and labor markets. As a by-product of the analysis, solution techniques that preserve the effects of time-varying belief distortions in the class of linear solutions are developed.

Keywords: subjective beliefs, pessimism, business cycles, survey data

JEL Classification: E32, D84, E71

Suggested Citation

Bhandari, Anmol and Borovička, Jaroslav and Ho, Paul, Survey Data and Subjective Beliefs in Business Cycle Models (September 3, 2019). Available at SSRN: https://ssrn.com/abstract=2763942 or http://dx.doi.org/10.2139/ssrn.2763942

Anmol Bhandari

University of Minnesota - Minneapolis - Department of Economics ( email )

1925 Fourth Street South
Minneapolis, MN
United States

Jaroslav Borovička (Contact Author)

New York University (NYU) - Department of Economics ( email )

19 W 4th Street, 6th floor
New York, NY 10012
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Paul Ho

Federal Reserve Banks - Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

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