Long-run growth uncertainty

Abstract

Observed macroeconomic forecasts display gradual recognition of the long-run growth of endogenous variables (e.g. output, output per hour) and a positive correlation between long-run growth expectations and cyclical activities. Existing business cycle models appear inconsistent with the evidence. This paper presents a model of business cycle in which households have imperfect knowledge of the long-run growth of endogenous variables and continually learn about this growth. The model features comovement and mutual in ‡uence of households'growth expectations and market outcomes, which can replicate the evidence, and suggests a critical role for shifting long-run growth expectations in business cycle ‡uctuations.

Expectations, Stagnation and Fiscal Policy

“…38 A similar phenomenon is observed in Kuang and Mitra in the context of the real business cycle model. The statistical results, impulse responses etc are very similar in these two scenarios: compare Kuang and Mitra (2016) and Kuang and Mitra (2015). In the former households forecast wages and interest rates i.e.…”

New Tests of Expectation Formation with Applications to Asset Pricing Models

“…As is shown later, the tests need to use both the PLM and ALM for model variables. 17 This section shows the typical speci…cations for subjective stock price beliefs in existing adaptive learning models imply that agents' forecasts of stock prices are cointegrated with consumption forecasts, as opposed to the survey evidence in Section 4.3.…”

Adaptive Learning and Labor Market Dynamics

“…Agents update their forecasts of future variables and resolve their dynamic optimization problem in order to make their decisions. This learning approach can be viewed as a version of the anticipated utility approach formulated by Kreps (1998) and used by Eusepi and Preston (2011) and Kuang and Mitra (2016) within the context of the RBC model; see the first two paragraphs of section 2 in Evans, Honkapohja, and Mitra (2012) for further discussion.…”

“…The point that there is an important divergence between the implied expectations in macro‐economic models with RE and the expectations drawn from survey data has been made in the context of other models; see, for example, Adam, Marcet, and Beutel (2017), Kuang and Mitra (2016), Slobodyan and Wouters (2012), Milani (2011), and Ormeño and Molnar (2015). These papers show that systematic errors/gaps in variables such as GDP and interest rates are evident in survey forecasts (like the SPF).…”