Modeling the Evolution of Expectations and Uncertainty in General Equilibrium

40 Pages Posted: 29 Apr 2016

See all articles by Francesco Bianchi

Francesco Bianchi

Duke University

Leonardo Melosi

Federal Reserve Bank of Chicago

Multiple version iconThere are 3 versions of this paper

Date Written: May 2016

Abstract

We develop methods to solve general equilibrium models in which forward‐looking agents are subject to waves of pessimism, optimism, and uncertainty that turn out to critically affect macroeconomic outcomes. Agents in the model are fully rational and conduct Bayesian learning, and they know that they do not know. Therefore, agents take into account that their beliefs will evolve according to what they will observe. This framework accommodates both gradual and abrupt changes in beliefs and allows for an analytical characterization of uncertainty. We use a prototypical Real Business Cycle model to illustrate the methods.

Suggested Citation

Bianchi, Francesco and Melosi, Leonardo, Modeling the Evolution of Expectations and Uncertainty in General Equilibrium (May 2016). International Economic Review, Vol. 57, Issue 2, pp. 717-756, 2016. Available at SSRN: https://ssrn.com/abstract=2772302 or http://dx.doi.org/10.1111/iere.12174

Francesco Bianchi (Contact Author)

Duke University ( email )

100 Fuqua Drive
Durham, NC 27708-0204
United States

Leonardo Melosi

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604
United States

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