Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/96645
Authors: 
Bianchi, Francesco
Melosi, Leonardo
Year of Publication: 
2013
Series/Report no.: 
Working Paper, Federal Reserve Bank of Chicago 2013-12
Abstract: 
We develop methods to solve general equilibrium models in which forward-looking agents are subject to waves of pessimism, optimism, and uncertainty that turn out to critically affect macroeconomic outcomes. Agents in the model are fully rational, conduct Bayesian learning, and they know that they do not know. Therefore, agents take into account that their beliefs will evolve according to what they will observe. This framework accommodates both gradual and abrupt changes in beliefs and allows for an analytical characterization of uncertainty. Shocks to beliefs affect economic dynamics and uncertainty. We use a prototypical Real Business Cycle to illustrate the methods.
Subjects: 
Markov switching
general equilibrium models
uncertainty
Bayesian learning
rational expectations
downside risk
rare disasters
JEL: 
D83
C11
E22
Document Type: 
Working Paper

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