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Confidence Collapse in a Multi-Household, Self-Reflexive DSGE Model | | Federico Guglielmo Morelli
; Michael Benzaquen
; Marco Tarzia
; Jean-Philippe Bouchaud
; | | Date: |
17 Jul 2019 | | Abstract: | We investigate a multi-household DSGE model in which past aggregate
consumption impacts the confidence, and therefore consumption propensity, of
individual households. We find that such a minimal setup is extremely rich, and
leads to a variety of realistic output dynamics: high output with no crises;
high output with increased volatility and deep, short lived recessions;
alternation of high and low output states where relatively mild drop in
economic conditions can lead to a temporary confidence collapse and steep
decline in economic activity. The crisis probability depends exponentially on
the parameters of the model, which means that markets cannot efficiently price
the associated risk premium. We conclude by stressing that within our
framework, {it narratives} become an important monetary policy tool, that can
help steering the economy back on track. | | Source: | arXiv, 1907.7425 | | Services: | Forum | Review | PDF | Favorites | |
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