Seminar in Macroeconomics - Financial Cycles under Diagnostic Beliefs
Time
Monday, 9. May 2022
12:00 - 13:15
Location
F425
Organizer
Chair of Macroeconomics
Speaker:
Antoine Camous (University of Mannheim)
Financial Cycles under Diagnostic Beliefs
Abstract: Swift changes in investors' sentiment, such as the one triggered by COVID-19 global outbreak in March 2020, lead to financial tensions and asset price volatility. We study the interactions of behavioral and financial frictions in an environment with endogenous risk-taking and capital accumulation. Agents form diagnostic expectations about future stochastic outcomes: recent realizations of aggregate shocks are expected to persist. This behavioral friction gives rise to sentiment cycles with excessive investment and occasional safety traps. The interactions with financial frictions lead to an endogenous amplification of financial instability. We discuss implications for policy interventions.