2020 Fiscal Year Research-status Report
Information, Rationality, and Confidence: Implications for Real and Financial Cycles
| Project/Area Number |
20K01546
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| Research Institution | Osaka University |
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Principal Investigator |
YOO DONGHOON 大阪大学, 社会経済研究所, 講師 (20868541)
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| Project Period (FY) |
2020-04-01 – 2023-03-31
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| Keywords | Business cycles / Noisy information / Expectations / Learning / DSGE / Diagnosticity / Misperception / Confidence |
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| Outline of Annual Research Achievements |
This project contributes to the existing literature by proposing a novel mechanism based on behavioral foundations and information frictions to replicate fluctuations. The methodology incorporating diagnosticity and misperception is carefully analyzed and theoretical implications are derived by offering a first treatment of diagnostic expectations in linear macroeconomic models and discussing how the combination of diagnosticity with imperfect information can rationalize under- and over-reaction in macroeconomics. We also incorporate recent advances in information processing and assess its importance under alternative informational assumptions by estimating a simple business cycle model using data for the US economy and show that the misperception model outperforms the rational learning model to explain the movements in consumption and productivity in our sample. Finally, we offer a structural interpretation of survey measures of consumer confidence by decomposing observed consumption fluctuations in changes due to fundamentals and due to temporary errors caused by noisy information.
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| Current Status of Research Progress |
Current Status of Research Progress
2: Research has progressed on the whole more than it was originally planned.
Reason
A theoretical framework incorporating diagnostic expectations to replace rational expectations is developed and applied to a class of linear dynamic general equilibrium models. A range of applications in macroeconomics have been studied with diagnostic expectations. This work has been presented at various seminars - the Virtual East Asia Macroeconomics Seminar series, the Institute of Economic Research, Hitotsubashi University, the New Economic School, and City University of Hong Kong. In addition, a dynamic general equilibrium model with misperception is developed and its performance against the rational learning counterpart has been analyzed using the US data. Finally, we have finished a work providing a structural interpretation of survey measures of consumer confidence by estimating a simple forward-looking model of consumption using national accounts. This work has been presented at Humboldt University of Berlin (Schumpeter-BSE-seminar).
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| Strategy for Future Research Activity |
A further empirical analysis will be conducted on a quantitative medium-scale DSGE model with diagnostic expectations; specifically, combining imperfect information with diagnosticity. This model will be estimated by the Bayesian method to match the U.S. data. A working paper draft expects to be available soon and this work will be further discussed at a number of conferences this year including the 2021 Society of Economic Dynamics (SED), the 2021 North American Summer Meeting, the 2021 Asian Meeting of the Econometric Society among others. A paper aims to provide the structural interpretation of consumer confidence is being revised and will be submitted to a journal this year. Finally, the model incorporating misperception into imperfect information will be further studied by using a small-scale open economic model, and the results will be disseminated through conferences and seminars in Japan and abroad.
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| Causes of Carryover |
Some plans to invite collaborators were postponed due to the Covid-induced pandemic.
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