Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/315136 
Year of Publication: 
2025
Series/Report no.: 
Texto para discussão No. 704
Publisher: 
Pontifícia Universidade Católica do Rio de Janeiro (PUC-Rio), Departamento de Economia, Rio de Janeiro
Abstract: 
We discover sentiment-driven equilibria in popular models of imperfect risk sharing. In these equilibria, sentiment dynamics behave like uncertainty shocks, in the sense that self-fulfilled beliefs about volatility drive aggregate fluctuations. Because such fluctuations can decouple from the wealth distribution, rational sentiment helps resolve two puzzles plaguing models emphasizing balance sheets: (i) financial crises emerge suddenly, featuring large volatility spikes and asset-price declines; (ii) assetprice booms, with below-average risk premia, predict busts and financial crises. Methodologically, our contribution is using stochastic stability theory to establish existence of sunspot equilibria.
Subjects: 
financial frictions
sunspot equilibria
self-fulfilling beliefs
sentiment
financial crises
uncertainty shocks
JEL: 
E00
E44
G01
Document Type: 
Working Paper

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