2021 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 / Diagnostic expectations / Imperfect information / Missperception / Consumer confidence / DSGE |
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| Outline of Annual Research Achievements |
This project proposes a novel mechanism based on behavioral ingredients and information frictions and applies it to widely used dynamic macroeconomic models. The methodology incorporating diagnosticity and misperception is carefully analyzed and theoretical implications are derived by offering a 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 show that the model with diagnostic expectations match the data better than the rational expectations counterpart. Second, 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. Third, 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. Fourth, using newly available quarterly data for U.S. states from 2005Q1 to 2015Q4, we re-examine the VAR evidence for the relationship between consumer confidence and economic activity and study whether consumer confidence affects economic activity independent of economic fundamentals. Our findings support both the animal spirit and the news interpretation of consumer confidence.
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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 (DE) to replace rational expectations (RE) is developed and applied to a class of linear
dynamic general equilibrium models. A range of applications in macroeconomics have been studied with DE. We produced a working paper titled "Incorporating Diagnostic Expectations into the New Keynesian Framework," and the paper is invited for revisio at the Review of Economic Studies. The paper has been presented at various seminars and workshops - Korean Macroeconomic Research Group, Sogang University, Keio University, and Korea University. Second, a dynamic general equilibrium model with misperception is developed and its performance against the rational learning counterpart has been analyzed using the US data. We are working to produce a working paper version of this work. Third, I have produced a working paper titled "What is consumer confidence?" with Jean-Paul L'Huillier and Robert Waldmann. Fourth, a working paper titled "Statistics and Common Sense" jointly with Nobuyuki Hanaki and Jan R. Magnus is produced. Fifth, we hosted "the 1st Winter Workshop in Recent Advances in Macroeconomics" jointly with he Osaka School of International Public Policy (OSIPP), Osaka University, the Department of Economics, Korea University, and the Department of Economics, University of Surrey, from January 20 to 21, 2022.
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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; we expect to estimate rational expectations versions (Smets and Wouters/Justiniano, Primiceri, and Tambalotti) of this model. This model will be estimated by the Bayesian method to match the U.S. data. We expect to complete revising this paper and resubmit it to the Review of Economic Studies. Second, my paper "What is consumer confidence?" is revised and is now under review at a journal. Third, 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. Fourth, we expect to complete our project analyzing how consumer confidecen innovations can be explain and subtmit it to a journal this year.
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| Causes of Carryover |
Some plans to invite collaborators were postponed due to the Covid-induced pandemic.
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