Abstract
This paper studies the impact of Higher Order Belief (HOB) shocks, representing shifts in agents’ beliefs about others’ beliefs, on macroeconomic outcomes. The dynamic causal effects of these shocks are identified by leveraging a combination of a proxy-VAR approach and DSGE-based instruments. Our findings suggest that HOB shocks are indeed a key driver of the business cycle and account for a sizeable share of the observed business cycle volatility. Finally, our identification approach ensures that these shocks are not confounded with other structural/fundamental shocks.
Keywords
Higher Order Beliefs; Business cycles; proxy-VAR; DSGE;
JEL codes
- C32: Time-Series Models • Dynamic Quantile Regressions • Dynamic Treatment Effect Models • Diffusion Processes
- E32: Business Fluctuations • Cycles
Reference
Patrick Fève, Fabrice Collard, and Alain Guay, “Believe it or not, it’s all about Beliefs!”, TSE Working Paper, n. 24-1539, May 2024.
See also
Published in
TSE Working Paper, n. 24-1539, May 2024