Expectations and belief-driven business cycles
Imperfect information and consumption fluctuations
My research focuses on understanding how informational concerns can enrich the dynamics of macro models. For example, introducing ambiguity into how consumers form expectations, I study asymmetric responses in consumption where the asymmetries are endogenously generated by the agents' preferences and incomplete knowledge about information quality. I show that consumption features asymmetric responses such that the absolute size of the responses depend on whether consumers have positive or negative views about the future, and that the estimation using U.S. data confirms this asymmetric nature of consumption responses.
In economic recessions consumption usually drops in tandem with other aggregate quantities as output or employment. Following the permanent income logic, these drops can be rationalized by the idea that consumers have pessimistic views about their long-run income. Using a standard signal-extraction model, I and my coauthor, Jean-Paul L'Huillier, show that this pessimism can be due either to a persistent fall of aggregate productivity before and during the recession (signaling a future decline of income), or to other negative information unrelated to fundamentals, which we label "bad news." We classify U.S. recessions (from 1919 to 2015) according to a bad news index that reflects this negative information. We find that both the Great Depression and the Great Recession score highest in this index. The index is such that we can rule out that this is due merely to the length or the depth of these recessions. Instead, these two recessions are similar in that both were aggravated by a wave of pessimism about future income which cannot be related to contemporaneous fundamentals.