NBER

Sushant Acharya

Macroeconomic and Monetary Studies Function
Federal Reserve Bank of New York
33 Liberty Street
New York, NY 10045

E-Mail: EmailAddress: hidden: you can email any NBER-related person as first underscore last at nber dot org
Institutional Affiliation: Federal Reserve Bank of New York

NBER Working Papers and Publications

February 2017The Anatomy of Sentiment-Driven Fluctuations
with Jess Benhabib, Zhen Huo: w23136
We show that sentiments - self-fulfilling changes in beliefs that are orthogonal to fundamentals - can drive persistent aggregate fluctuations under rational expectations. Such fluctuations can occur even in the absence of any exogenous aggregate fundamental shocks. In addition, sentiments also alter the volatility and persistence of aggregate outcomes in response to fundamental changes. We characterize conditions under which sentiments drive persistent fluctuations and when they only affect aggregate outcomes contemporaneously. We also discuss how these sentiments are related to noise shocks- driven fluctuations studied in the literature on information frictions.

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